Question 1

In the world of high-end audio amplifiers, having an edge on technology and craftsmanship are prerequisites to success. Professor Henry King had both. This year, his audio equipment company, King Audio, rocked to $500 million in sales after 10 years in business. His amplifier lines covered from pure digital Class-D amplifier to audiophiles delight tube-amplifier. King Audio won numerous industry awards and sold the products to those wealthy audiophiles in America and Europe.

King Audio had made it and its growth was so remarkable that no one could have foreseen. However, securities analysts speculated that the company could not keep up the pace. They warned that fierce competition in the hi-fi industry might push the firm to encounter little or zero growth in future. They estimated that dividend to stockholders will be flat in coming years.

Contrary to securities analysts prediction, Professor King felt that his company could maintain a constant growth with annual dividend growth rate of 8% to shareholders in future. His optimism is based on the launch of a long-term expansion plan into Asian markets, especially in Japan and Singapore, in coming months. However, venturing into Asian markets is expected to increase the risk of the firm - analysts consensus is that beta () of King Audio will be increased from the current 1.25 to 1.60 as a result.

In preparing the launch of the long-term expansion plan, King Audios chief financial officer, Peter Prince, has assigned you to evaluate the firms current value and stock price. He wants you to consider the conservative prediction of the securities analysts as well as the aggressive prediction from the founder Professor King.

Prince has provided the following 2020 financial data to aid your analysis:

King Audio CAPM Scenario Table

Data Item	2020 value
Earnings per share (EPS)	$8.86
Market price per share of common stock	$46.60
Book value of common stock equity	$22,000,000
Total common shares outstanding	2,500,000
Current common stock dividend per share	$4.70

Beta (i)	0	0.25	0.5	0.75	1	1.25	1.5	1.75	2
Required return (%)	6	8	10	12	14	16	18	20	22

1. (d) If Professor Kings prediction is correct, what will be the value of King Audios share if the firm maintains a constant 8% annual growth rate in its dividends and a beta of 1.60?

2. (e) Compare the current share price of King Audio and the stock values found in parts (a), (c), and (d). Discuss why these values may differ. From your analysis, which side do investors believe? The prediction from securities analysts or the prediction by Professor King? Finally, what insight you can find between market consensus and CAPM?