Part II. Problems 1. Consider Firm ABC that has the income statement below for the year that just ended (2020). The firm has 22.XX) shares of stock outstanding. A. They have just announced a plan to incrcase dividends by 5.30 per share next ycar, and then by another 5.20 per share in the following year. After that, you expect a growth rate of 3% for the rest of time. The firm has a required rate of retum of 8.5%. Given this, what should the price be for cach share of stock? (10 pts) Firm ABC For the Year Ending Dec 31, 2020 Revenues COGS Depreciation EBIT Interest Taxable income Taxes (21%) Net Income Dividends Addition to Retained Earnings 526,540 292,224 69,000 165,316 35,400 129,916 27,282 102,634 56,490 45 144 B. Now, suppose you are an investor in Firm ABC from above. You own 500 shares of the stock, and also just bought 25 of their coupon bonds. These bonds were issued exactly 13 years ago as 30-year bonds at that time. They pay semi-annual coupons based upon a coupon rate of 5% and a face value of $1,000. The YTM is currently 4.8%. What is your total investment (equity - debt) in Firm ABC? (10 pts) C. Fast forward three years and assume everything has gone exactly as you expected. You still hold the positions (both the stock and the bonds), so you haven't made any money from the price movement at all. But, you have made money from the income components. Over the three years, how much in total income have you received? (10 pts) Part II. Problems 1. Consider Firm ABC that has the income statement below for the year that just ended (2020). The firm has 22.XX) shares of stock outstanding. A. They have just announced a plan to incrcase dividends by 5.30 per share next ycar, and then by another 5.20 per share in the following year. After that, you expect a growth rate of 3% for the rest of time. The firm has a required rate of retum of 8.5%. Given this, what should the price be for cach share of stock? (10 pts) Firm ABC For the Year Ending Dec 31, 2020 Revenues COGS Depreciation EBIT Interest Taxable income Taxes (21%) Net Income Dividends Addition to Retained Earnings 526,540 292,224 69,000 165,316 35,400 129,916 27,282 102,634 56,490 45 144 B. Now, suppose you are an investor in Firm ABC from above. You own 500 shares of the stock, and also just bought 25 of their coupon bonds. These bonds were issued exactly 13 years ago as 30-year bonds at that time. They pay semi-annual coupons based upon a coupon rate of 5% and a face value of $1,000. The YTM is currently 4.8%. What is your total investment (equity - debt) in Firm ABC? (10 pts) C. Fast forward three years and assume everything has gone exactly as you expected. You still hold the positions (both the stock and the bonds), so you haven't made any money from the price movement at all. But, you have made money from the income components. Over the three years, how much in total income have you received? (10 pts)
