(Stock Valuation Constant Growth and Variable Growth Model)

i) Differentiate the key differences between debt and equity?

ii) What general procedures must a private firm follow to go public via an initial

public offering (IPO), where an investment banker plays a crucial role in a public

offering?

iii) The common stock of Denis and Denis Research, Inc., trades for $80 per

share. Investors expect the company to pay a $3.90 dividend next year, and

they expect that dividend to grow at a constant rate forever. If investors

require a 12% return on this stock, what is the dividend growth rate that they

are anticipating?

iv) Vicky Robb is considering purchasing the common stock of Hawaii Industries,

a rapidly growing boat manufacturer. She finds that the firm's most recent

(2020) annual dividend payment was $2.50 per share. Vicky estimates that

these dividends will increase at a 20% annual rate, g1, over the next 3 years

(2021, 2022, and 2023) because of the introduction of a hot new boat. At the

end of the 3 years (the end of 2023), she expects the firm's mature product

line to result in a slowing of the dividend growth rate to 8% per year, g2, for

the foreseeable future. Vicky's required return, rs, is 15%.

Required: What is the current (end-of-2020) value of Hawaii's common stock,

P0 = P2020.