Business Finance a) Top Secrets stronghold company (a gossip company has fallen on hard times. Its management expects to pay no dividend for the next 2 years. However, the dividend for year 3 will be GH1 per share and the dividend is expected to grow at a rate of 3% in year 4, 6% in year 5 and 11% in year 6 and therefore. If the required return for this company is 20%, what is the current equilibrium price of the share? b) The stock that is selling for GH12 today is expected to pay GH 1 next year, GH2 the year after and GH 3 the following year. How much are you expecting to sell it for after the third dividend if you buy it today? Your discount rate is 32%. (5 marks) . Suppose a firm's stock is selling for $10.50. It just paid a $1 dividend, and dividends are expected to grow at 5% per year. (5 Marks) What is the required return? What is the dividend yield? What is the capital gains yield? d) Discuss the Efficient Market Hypothesis and what lessons does it offer the investor today (15 Marks) e) The required return for Williamson Heating's stock is 12%, and the stock sells for GHS 40 per share. The firm just paid a dividend of GHS1.00, and the dividend is expected to grow by 30% per year for the next 4 years, so D4 = GHS 1.00(1.30)4 = GHS 2.8561. After t-4, the dividend is expected to grow at a constant rate of X% per year forever. What is the stock's expected constant growth rate after t = 4. i.e., what is X? Real is your boss and the treasurer of Free Cash Flow (FCF). She asked you to help her estimate the intrinsic value of the company's stock. FCF just paid a dividend of GHS 1.00, and the stock now sells for GHS 15.00 per share. Real asked a number of security analysts what they believe FCF's future dividends will be, based on their analysis of the company. The consensus is that the dividend will be increased by 10% during Years 1 to 3, and it will be increased at a rate of 5% per year in Year 4 and thereafter. Real asked you to use that information to estimate the required rate of return on the stock (10 Marks) ) AB's preferred stock pays a dividend of $1.00 per quarter. If the price of the stock is $45.00, what is its nominal (not effective) annual rate of return? (5 Marks) h) Connor Publishing's preferred stock pays a dividend of GHS 1.00 per quarter, and it sells for GHS 55.00 per share. What is its effective annual (not nominal) rate of return? (5 Marks) 1) What do technical analyst do in stock valuation and how different is that from fundamental analyst? (15 Marks) Business Finance 1a) Top Secrets stronghold company (a gossip company) has fallen on hard times. Its management expects to pay no dividend for the next 2 years. However, the dividend for year 3 will be GH1 per share and the dividend is expected to grow at a rate of 3% in year 4,6% in year 5 and 11% in year 6 and therefore. If the required return for this company is 20%, what is the current equilibrium price of the share? b) The stock that is selling for GH12 today is expected to pay GH 1 next year, GH2 the year after and GH 3 the following year. How much are you expecting to sell it for after the third dividend if you buy it today? Your discount rate is 32%. (5 marks) c) Suppose a firm's stock is selling for $10.50. It just paid a $1 dividend, and dividends are expected to grow at 5% per year. (5 Marks) a. What is the required return? b. What is the dividend yield? c. What is the capital gains yield? d) Discuss the Efficient Market Hypothesis and what lessons does it offer the investor today (15 Marks) e) The required return for Williamson Heating's stock is 12%, and the stock sells for GHS 40 per share. The firm just paid a dividend of GHS1.00, and the dividend is expected to grow by 30% per year for the next 4 years, so D4 = GHS 1.00(1.30)4 = GHS 2.8561. After t = 4, the dividend is expected to grow at a constant rate of X% per year forever. What is the stock's expected constant growth rate after t = 4, i.e., what is X? f) Real is your boss and the treasurer of Free Cash Flow (FCF). She asked you to help her estimate the intrinsic value of the company's stock. FCF just paid a dividend of GHS 1.00, and the stock now sells for GHS 15.00 per share. Real asked a number of security analysts what they believe FCF's future dividends will be, based on their analysis of the company. The consensus is that the dividend will be increased by 10% during Years 1 to 3, and it will be increased at a rate of 5% per year in Year 4 and thereafter. Real asked you to use that information to estimate the required rate of return on the stock (10 Marks) g) AB's preferred stock pays a dividend of $1.00 per quarter. If the price of the stock is $45.00, what is its nominal (not effective) annual rate of return? (5 Marks) h) Connor Publishing's preferred stock pays a dividend of GHS 1.00 per quarter, and it sells for GHS 55.00 per share. What is its effective annual (not nominal) rate of return? (5 Marks) i) What do technical analyst do in stock valuation and how different is that from fundamental analyst? (15 Marks)
