PROBLEMS 10 and 14 (ASAP)
38 Part stroduction to Financial Management Valuation Based on Two-Stage Growth: Concept Connection Example 8-5 (page 357) 10. The Miller Milk Cempuhas just comes with a new lactose-free wet product for who castelo drink ordinary dairy product Management expects the new product to feel growth soforhout two years. After that competition will copy the ideas and produces products and growth will return to about which is normal for the dairy industry in the Miller recently pud d ividend 26which will grow with the company. The takmarto Miler is typically around on. What is the most you will pay foras Publish ers , leader in the computer er fuld. Seekha plestially ped d er d e t. Alph, the first new product, we likely to catches to the form growth rate to 25 for the next years. Howe y products have shorts d u can be expected to restore normal mutefon after the Bet the prodat, a legfon t o s 'tar confident about about Alpha Sem a rly did was $4, and firm in the industry typy ere holder IL You are an investment analyst for a brokegem and have been asked to develops recommendation about Sok for the firm's clients. You've studied the fundamentals of the industry and the firm, and are now ready to determine what the stock should sellforbund on the pentue of future cash flow Calculate a value for Soek's stock assuming product Alphas successful but Betast. In the words some two years of growth at followed by growth lasting indefinitely . Calculate a price assuming Bet is also conful and holds Softck's growth rate additional year. for two 12. Calculate a price for Sotkaming Alpha is successful and let is also successful but doet de quite as well as Alpha. Assume Softek grows at 2 for two years and then at 18. for two more After that it continues to grow at (HistDon't be confused by the fact that there are now there growth periods. Just calculate successive dividends, multiplying by one plus the growth rate in effect until you get the first divided into the period of normal growth. Then apply the Gordon model. A timeline is a must for this problem.) 13. How would you advise clients about Sock stock as an investment under the following conditional Give masons for your advice. (No calculation) Softek is currently selling at a price very ear that calculated in part(a) of Problem IL. b. It is willing near the price calculated in Problem 12 c. It is selling at a price slightly above that calculated in part(b) of Problem IL 14. Garrett Corp has been going through a difficult financial period. Over the past three years. its stock price has dropped from $50 to 18 per share. Throughout this downturn, Garrett has managed to pay a 31 dividend each year. Management feels the worst is over but intends to maintain the st dividend for three more years after which they plan to increase it by per you indestey Comparable works are returning If the projections are accurate, is Garrett stock pod buy S18? How do you think the market feels about Garrett's management 15. General Machine Works Inc. (GMW has been losing money for some time but has managed to maintain an annual dividend of Sl. The company's state is to restructure by ring smaller while working on labor and product line problems at the same time. Once that do management feels the firm will return to profitability and beg g e growth tabo 3 per year. GMW's stock price has been declining for some time and is now in the eighborhood of 20 per share
