Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Hamlin Steel Company wishes to determine the value of Craft Foundry, a firm that it is considering acquiring for cash. Hamlin wishes to determine the

Hamlin Steel Company wishes to determine the value of Craft Foundry, a firm that it is considering acquiring for cash. Hamlin wishes to determine the applicable discount rate to use as an input to the constant-growth valuation model. Craft's stock is not publicly traded. After studying the required returns of firms similar to Craft that are publicly traded, Hamlin believes that an appropriate risk premium on Craft stock is about 5%. The risk-free rate is currently 7%. Craft's dividend per share for each of the past 6 years is shown in the following table:

Year Dividend Per Share
2015 $3.01
2014 $2.79
2013 $2.58
2012 $2.39
2011 $2.21
2010 $2.05

a. Given that Craft is expected to pay a dividend of $3.25 next year, determine the maximum cash price that Hamlin should pay for each share of Craft. (Hint: Round the growth rate to the nearest whole percent.)

b. Describe the effect on the resulting value of Craft from: (1) A decrease in its dividend growth rate of 2% from that exhibited over the 2010-2015 period. (2) A decrease in its risk premium to 4%.

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

Financial Management In The Sport Industry

Authors: Matthew T Brown, Daniel Rascher, Mark S Nagel, Chad Mcevoy

1st Edition

1934432040, 978-1934432044

More Books

Students also viewed these Finance questions