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Risk and ValuationHamlin Steel Company wishes to determine the value of CraftFoundry, a firm that it is considering acquiring for cash. Hamlin wishes to determine the applicable discount rate to use as an input to theconstant-growth valuation model. Craft's stock is not publicly traded. After studying the required returns of firms similar to Craft that are publiclytraded, Hamlin believes that an appropriate risk premium on Craft stock is about 5

5%. Therisk-free rate is currently 8

8%. Craft's dividend per share for each of the past 6 years is shown in the followingtable: LOADING...

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a. Given that Craft is expected to pay a dividend of $2.73

2.73 nextyear, determine the maximum cash price that Hamlin should pay for each share of Craft. (Hint: Round the growth rate to the nearest wholepercent.)

b. Describe the effect on the resulting value of Craftfrom:

(1) A decrease in its dividend growth rate of2% from that exhibited over the2010-2015 period.

(2) A decrease in its risk premium to 4%

a. The required return onCraft's stock is

The maximum cash price that Hamlin should pay for each share of Craft is $

b.(1) If the dividend growth rate decreases by2%, the maximum cash price that Hamlin should pay for each share of Craft is $

2) If the risk premium decreases to 4%, the required return onCraft's stock is

With a 12% requiredreturn, the maximum cash price that Hamlin should pay for each share of Craft is $