Scenario: Congratulations! You have been hired by Jennie-Mae Industries – a small privately held corporation with diversified business interests and holdings. You will serve as a Special Advisor to Jennifer McDade (“Jennie”), the CEO. In this role, you will be assisting Jennie by providing insights to help address key questions. Jennie knows you took a finance class – and wants your advice on a number of questions. Can you help her?

Potential stock investment (15 marks)

Jennie wants your advice on a potential stock purchase. There is excess capital on the balance sheet – and she wants to put it to good use. She is excited because he heard that Misty Industries stock is trading at $100. She notes that Misty Industries just paid out $1.7308M in dividends and repurchased $4.3983M worth of shares. Misty Industries has 1.12M shares outstanding. Total payouts are expected to grow at an annual rate of 5%. Jennie – like the other investors of Misty Industries – expects a 10% rate of return on shares.

(a) What should Jennie do? You recall from your finance class that you should use the Total Payout model to estimate of the stock price today. You can assume that all payouts occur annually and that the next payout will be in exactly one year. Show your work and clearly state your final answer.

(b) Jennie thanks you for your advice. But, thinking about it some more, Jennie asks you if she should buy or not buy the stock if the stock were currently trading at $200 instead of $100. What do you advise her? (2 marks)

(c) Jennie wonders how things might be different if the payouts mentioned above did not grow by 5% - but instead were flat. Should the stock be purchased? Assume that the price is still $100. (3 marks)