Your supervisor has asked you to evaluate the relative attractiveness of the stocks of two very similar chemical companies. Litchfield Chemical Corp. (LCC) and Aminochem Company (AOC). Both firms have a June 30 fiscal year end. You have compiled the data in Table 1 for this purpose. Use a 1-year time horizon and assume the following: Real gross domestic product is expected to rise 5%; S&P 500 expected total return of 20%; U.S. Treasury bills yield 5%; and 30 year U.S. Treasury bonds yield 8%. A. Calculate the value of the common stock of LCC and AOC using the constant growth dividend discount model. Show your work. (8 marks) B. Calculate the expected return over the next year of the common stock of LCC and AOC using the capital asset pricing model, Show your work. (8 marks) Calculate the internal implied, normalized, or sustainable) growth rate of LCC and AOC. Show your work. (8 marks) D. Recommend LCC or AOC for investment. Justify your choice by using your answers to A, B, C and the information in Table 1. (6 marks) Table 1 Litchfield Chemical (LCC) Aminochem (AOC) $50 10 $30 20 $4.00 $3.20 Current stock price Shares outstanding (millions) Projected earnings per share (fiscal 1996) Projected dividend per share (fiscal 1996) Projected dividend growth ate Stock beta Investor's required rate of return $1.60 $0.90 8% 1.2 7% 1.4 10% 11% Balance sheet data (millions) Long-term debt Stockholders' equity $100 $300 $130 $320 Your supervisor has asked you to evaluate the relative attractiveness of the stocks of two very similar chemical companies. Litchfield Chemical Corp. (LCC) and Aminochem Company (AOC). Both firms have a June 30 fiscal year end. You have compiled the data in Table 1 for this purpose. Use a 1-year time horizon and assume the following: Real gross domestic product is expected to rise 5%; S&P 500 expected total return of 20%; U.S. Treasury bills yield 5%; and 30 year U.S. Treasury bonds yield 8%. A. Calculate the value of the common stock of LCC and AOC using the constant growth dividend discount model. Show your work. (8 marks) B. Calculate the expected return over the next year of the common stock of LCC and AOC using the capital asset pricing model, Show your work. (8 marks) Calculate the internal implied, normalized, or sustainable) growth rate of LCC and AOC. Show your work. (8 marks) D. Recommend LCC or AOC for investment. Justify your choice by using your answers to A, B, C and the information in Table 1. (6 marks) Table 1 Litchfield Chemical (LCC) Aminochem (AOC) $50 10 $30 20 $4.00 $3.20 Current stock price Shares outstanding (millions) Projected earnings per share (fiscal 1996) Projected dividend per share (fiscal 1996) Projected dividend growth ate Stock beta Investor's required rate of return $1.60 $0.90 8% 1.2 7% 1.4 10% 11% Balance sheet data (millions) Long-term debt Stockholders' equity $100 $300 $130 $320
