Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Manufacturin... Early in 2013, Inez Marcus, the chief financial officer for Suarez Manufacturing, was given the task of assessing the impact of a proposed risky

Manufacturin...

Early in 2013, Inez Marcus, the chief financial officer for Suarez Manufacturing, was given the task of assessing the impact of a proposed risky investment on the firm's stock value. To perform the necessary analysis, Inez gathered the following information on the firm's stock.

During the immediate past 5 years (2008-2012), the annual dividends paid on the firm's common stock were as follows:

Year

Dividend per share

2012

$ 1.90

2011

$1.70

2010

$1.55

2009

$1.40

2008

$1.30

The firm expects that without the proposed investment, the dividend in 2013 will be $ 2.09 per share and the historical annual rate of growth (rounded to the nearest whole percent) will continue in the future. Currently, the required return on the common stock is 14.0 % Inez's research indicates that if the proposed investment is undertaken, the 2013 dividend will rise to $ 2.15 per share and the annual rate of dividend growth will increase to 13.0 % She feels that in the best case, the dividend would continue to grow at this rate each year into the future and that in the worst case, the 13.0 % annual rate of growth in dividends would continue only through 2015, and then, at the beginning of 2016, would return to the rate that was experienced between 2008 and 2012. As a result of the increased risk associated with the proposed risky investment, the required return on the common stock is expected to increase by 2.0 % to an annual rate of 16.0 % regardless of which dividend growth outcome occurs. Armed with the preceding information, Inez must now assess the impact of the proposed risky investment on the market value of Suarez's stock.

a. Find the current value per share of Suarez Manufacturing's common stock.

b. Find the value of Suarez's common stock in the event that it undertakes the proposed risky investmentand assuming that the dividend growth rate stays at

13.0 % forever. Compare this value to that found in part (a).

What effect would the proposed investment have on the firm's stockholders? Explain.

c. On the basis of your findings in part (b),do the stockholders win or lose as a result of undertaking the proposed risky investment? Should the firm do it? Why?

d. Rework parts (a)and (b) assuming that at the beginning of 2016 the annual dividend growth rate returns to the rate experienced between 2008 and 2012.

image text in transcribed
image text in transcribed
image text in transcribed
a. Find the current value per share of Suarez Manufacturing's common stock The growth rate of dividends is 52 25% (Round to two decimal places) The current va por share will be 7157 Round to the nearest cont) b. Find the common stock in the event that does the d i v entand assuming that the dividend growth rate stays of 130 forever compare the value to a found in parta) The value of common stock if the sky investment is made will be found to the newest cont) What effect would the proposed investment have on them's stockholdersplan Solotrom the drop-down menu The higher growth rate associated with undertaking the investment the market value of the stock c. On the basis of your findings in parti do the stockholders win or lose as a result of undertaking the proposed risky investment should the fim do it? Why? Select from the drop down menus) Enter your answer in each of the answer boxes The p ershare dividend for 2016 e 181 Hound to the nearestent The annual per shredd for 2015 wilt 1 Hound to the nesten The p ershare dividend for 2016 will be 12 Hound to the rest The pershor 2015 wil bo u nd to the cont Assuming the lower growth rate beginning in 2016. The vale per Share today wil b o und to the cont The value phare for 2015 wil b o und to the nearest Andrew the begin 2016, the vapor share t h e cont Should them to the rivestment Select rom the drop down menus them th e take the proposed at the price persone 51415 The drums not the show. The Enter your answer in each of the answer boxes

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 EMEA Theory And Practice

Authors: Michael Ehrhardt, Roland Fox, Eugene Brigham

2nd Edition

1473760216, 9781473760219

More Books

Students also viewed these Finance questions