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Hello I need help with a word problem. I have done parts a through c and I assumed a risk free rate of 4% and
Hello I need help with a word problem. I have done parts a through c and I assumed a risk free rate of 4% and a market rate of 11%. I am struggling with the last few parts of the problem d through f. Any help would be greatly appreciated. I will attach the entire word problem so it can be looked over. Thank you
In the world of soft drinks Soda Pop is a new and up and comer. The company has been on a journey trying to find a foothold in it distribution chain. Recently the company hired a maverick in the marketing industry by the name of Tom Smith. The company's product doesn't seem to be much different than the much larger competitors but the company has decided to follow after the microbrewers and offer a different line of beverages. With the help of Tom Smith, Mathew Stephens saw the sales of his company rocket to $500 million in sales after 5 years in business. His company gave soda drinkers something different, they don't provide a diet soda nor a corn syrup product. What Mathew found was that there was a niche for a beverage with less sweetness, half the calories, all natural ingredients and a vast array of flavoring. Soda Pop had made it. The company's historical growth was so spectacular that no one could have predicted it. However, securities analysts speculated that Soda Pop could not keep up the pace. They warned that competition in this space was going to get fierce and that the firm might encounter little to no growth in the future. They estimated that stockholders also should expect no growth in future dividends. Contrary to the conservative securities analysts, Mr. Stephens feels that the company could maintain a constant annual growth rate in dividends per share of 11.5% in the future, or possibly 15% for the next 2 years and 11.5% thereafter. Mr. Stephens based his estimates on an established long-term expansion plan throughout the United States, Canadian and Mexican markets. Venturing into these markets was expected to cause the risk of the firm, as measured by the beta on its stock, to increase immediately from 1.1 to 1.5. In preparing the long-term financial plan, Sod Pop's chief financial officer, Mr. Crowley, has assigned a junior financial analyst, Scot Robinson, to evaluate the firm's current stock price. He has asked Scot to consider the conservative predictions of the securities analysts and the aggressive predictions of the company founder, Mathew Stephens. Mr. Crowley has compiled these 2015 financial data to aid his analysis: Data item 2015 value Earnings per share (EPS)$8.26 Price per share of common stock $104.25 Book value of common stock equity $325,000,000 Total common shares outstanding 8,300,000 Common stock dividend per share $4.05 Data Points Beta, b Required Return, K 0 2.25% .25 4.600% .5 6.950% .75 9.300% 1 11.650% 1.25 14.000% 1.5 16.350% 1.75 18.700% 2.0 21.050% To Do a. What is the firm's current book value per share? b. What is the firm's current P/E ratio? c. (1) What is the current required return for Soda Pop stock (use CAPM)? (2) What will be the new required return for Soda Pop stock assuming that they expand into Other States, Canadian, and Mexican markets as planned (use CAPM)? d. If the securities analysts are correct and there is no growth in future dividends, what will be the value per share of the Soda Pop stock? (Note: use the new required return on the company's stock here) e. (1) If Mr. Stephens' predictions are correct, what will be the value per share of Soda Pop's stock if the firm maintains a constant annual 11.5% growth rate in future dividends? (Note: Continue to use the new required return here.) (2) If Mr. Stephens' predictions are correct, what will be the value per share of Soda Pop's stock if the firm maintains a constant annual 15% growth rate in dividends per share over the next 2 years and 11.5% thereafter? (Note: Use the new required return here.) f. Compare the current (2015) price of the stock and the stock values found in parts a, d, and e. Discuss why these values may differ. Which valuation method do you believe most clearly represents the true value of the Ryan stockStep by Step Solution
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