Question
Rachel set her staff to work. They began by trying to establish the discount rate they would use to compute the present value of expected
Rachel set her staff to work. They began by trying to establish the discount rate they would use to compute the present value of expected future income flows. The stock of 11-Up sold for $39.29 a share on January 2, 2019, and the dividend payment was $2.50/share per year. Over the five years prior to valuation, the dividend per share had increased 10 percent per year. The Beta book of Morgan Stanley reports a beta of 1.4 for 11-Up and a projection of earnings growth of 9 percent annually for many years into the future. The projection for returns on the S&P 500 was about 12 percent for 2019. The current yield to maturity on a 90-day Treasury Bill was 2 percent, and the corporate income tax rate was 30 percent. Finally, the plants net cash flow as of December 31, 2018 was $5 million, after taxes, and 11-Up has no debt. 1. Does the dividend approach to valuing shares explain the current, January 2, 2019, price of 11-Up stock? Please show and explain. 2. Find the appropriate discount rate for 11-Up to use in its valuation. 3. Put yourself in Rachels shoes. Would you contest the State of Californias valuation? Explain.
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