Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Thx a lot. Question 1 In the world of high-end audio amplifiers, having an edge on technology and craftsmanship are prerequisites to success. Professor Henry

image text in transcribedimage text in transcribed

Thx a lot.

image text in transcribedimage text in transcribed
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 (B) 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 Audio's chief financial officer, Peter Prince, has assigned you to evaluate the firm's 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: 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 King Audio CAPM Scenario Table Beta (Bi) 0 0.25 0.5 0.7 1.25 1.5 1.7 2 Required return (%) 6 8 10 12 14 16 18 20 22Requirements: (80 (b) (C) (d) (6) Determine the book value per share and the current PIE ratio of the rm. Utilizing the capital asset pricing model (CAPM), assess the required return and risk premium of King Audio stock if beta coefficient of the firm (Bi) is 1.25 and 1.6 respectively. (Hint: looking into the CAPM Scenario Table above to nd out the market return (Rm) analr the risk-free rate (Rf) rst). What relationship you have observed on the required retum and risk premium of King Audio if beta increase as expected? If King Audio has constant, no growth dividend in future and beta has gone up to 1.60 as predicted by securities analysts, what will be the share price of King Audio? If Professor King's prediction is correct, what will be the value of King Audio's share if the firm maintains a constant 8% armual growth rate in its dividends and a beta of 1.60? 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 om securities analysts or the prediction by Professor King? Finally, what insight you can find between market consensus and CAPM? -End- (16 marks) (34 marks) (8 marks) (8 marks) (34 marks)

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access with AI-Powered Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Calculus Early Transcendentals

Authors: James Stewart

8th edition

1285741552, 9781305482463 , 978-1285741550

Students also viewed these Finance questions

Question

Should a supportive working relationship be a true friendship?

Answered: 1 week ago

Question

List the characteristics of wellset goals.

Answered: 1 week ago

Question

Outline the five-step sequence in a decision process. lop25

Answered: 1 week ago