Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Besides running his own businesses, Tommy is also an avid stock investor and has a team of professional investment managers overseeing his stock portfolio. Hes

Besides running his own businesses, Tommy is also an avid stock investor and has a team of professional investment managers overseeing his stock portfolio. Hes trying to determine the fair value of a stock using a simple dividend discount model. Information on the stock is as follows: Macchiato Ltd is a famous coffee retail chain, and its stock traded at $42 at the beginning of 2016. Its beta estimate by a beta service company is 1 and its market risk premium is 6%. The risk free rate at the end of 2015 was 1.6%. The firm was expected to pay dividends of $1.60 per share at the end of 2016 and 2017. (a) Using the Capital Asset Pricing Model (CAPM), calculate the required rate of return. (1 mark) (b) At what price do you expect Macchiato Ltd to sell at the end of 2017 if you forecast it will not pay the dividends as expected? (3 marks) (c) At what price do you expect Macchiato Ltd to sell at the end of 2017 if you forecast it will pay the dividends as expected? (3 marks) (d) Assume that Macchiato Ltds investors expect it to pay a dividend of $2.50 per share forever. Using the required rate of return calculated in (a) above, determine the value gained or lost per share by buying a share at $42. (3 marks) (e) Macchiato Ltd traded at 4.5 times sales in 2015. It was reporting a net profit margin of its sales of 14 percent. What was its P/E ratio? (4 marks) (f) Macchiato Ltd had 700,000 shares at the end of 2015. On January 23, 2016 it issued an additional 250,000 shares to the market at the market price of $42 per share. Assess the effect of this share issue on the price per share of the firm.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

The Complete Guide To Capital Markets For Quantitative Professionals

Authors: Alex Kuznetsov

1st Edition

0071468293, 978-0071468299

More Books

Students also viewed these Finance questions

Question

=+19.2. (a) Show that L"((0, 1], , A) is not separable.

Answered: 1 week ago

Question

State the uses of job description.

Answered: 1 week ago

Question

Explain in detail the different methods of performance appraisal .

Answered: 1 week ago