Hawkins News Ltd. Has been growing at a rate of 20%, and you expect this growth rate in earnings and dividends to continue for another three years.

i. If the last dividend paid was $2, what will the next dividend be?

ii. If the discount rate is 15% and the steady growth rate after three years is 4%, what should the stock price be today?

iii. What is your prediction for the stock price in one year?

iv. Show that the expected return equals the discount rate?

15 marks

Q4.b. Warwick Plc. Is considering a project that will result in initial after-tax cash savings of $2.9 million at the end of the first year, and these savings will grow at a rate of 2% per year indefinitely. The firm has a targeted debt-to-equity ratio of 0.75; a cost of equity of 10%; and after-tax cost of debt of 4.6%. The cost-saving proposal is somewhat riskier than the usual project the firm undertakes. Therefore, management uses the subjective approach and applies an adjustment factor of +3% for the cost of capital for such risky projects.

Under what circumstances should Warwick Plc. take on the project? 10 marks