Now lets go back to the perpetual operation assumption. Also, imagine that I can grow my revenue and income 5% annually by expanding into BOWSA and YOWSA(blackberry and yucca flavors). What would be a fair % stake for Warren Buffet in this case assuming that we assume that the initial $20 million on advertising will allow us tolaunch the follow up flavors without additional ads. Hint for growth stocks the present value of dividends is equal to the initial dividend divided by the discount rate minusthe growth rate. Hence, its Div1/(.10-.05) as opposed to Div1/.10 for the no growth valuation. This is a handy math fact that is not too hard to prove, so it's useful for valuingstocks that tend to grow (in the real world) But it does require assuming perpetual growth forever so valuation is harder practice (a mix of growth in the early life cycle of acompany followed by steady dividends or slower growth or even declining profits after the mature phase)O None of these are accurateO PV of dividends is $80 million so Buffet would give me $20 million for a 25% stakeO PV of divide3nds is $60 million so a 33% stake makes senseO PV of dividends is still $40 million so no change

Answered: Image /qna-images/answer/1f0583ed-0b63-45b1-9b31-37150049e009.jpg

Answered: Now lets go back to the perpetual…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

See similar textbooks

Similar questions

Consider the following security: Brous Metalworks Earnings Per Share, Time = 0 $2.00 Dividend Payout Rate 0.250 Return on Equity 0.150 Market Capitalization Rate 0.125 Required: Using the information in the tables above, please calculate the sustainable growth rate, dividends per share, and intrinsic value per share. Then solve for the present value of growth opportunities. (Use cells A5 to B8 from the given information to complete this question.) Brous Metalworks Sustainable Growth Rate Dividends per share (Next Year) Intrinsic Value No-Growth Value Per Share Present Value of Growth Opportunities (PVGO)
The owners of Sitty Inc need a return of 12% pa. The current performance of the firm leads to the belief that a dividend of sh. 5/= would be paid and after the year the price of the share would be Sh. 20 If the current price of the share is Sh. 22/= do you think the share is worth buying? How do you justify that the positive return could be generated despite the price falling to Sh.20 after one year? What maximum price do you think the Investors should pay for shares of ABC Limited
Assume that you are a consultant to Broske Inc., and you have been provided with the following data: the next expected dividend is $0.67; the current market price is $42.50 and the constant growth rate for the dividends is 8.00% Based on the information given what is the cost of equity?
I am having issues with this problem and would like some help if possible: The future earnings, dividends, and common stock price of Callahan Technologies Inc. are expected to grow 5% per year. Callahan's common stock currently sells for $21.00 per share; its last dividend was $2.40; and it will pay a $2.52 dividend at the end of the current year. Using the DCF approach, what is its cost of common equity? Do not round intermediate calculations. Round your answer to two decimal places. % If the firm's beta is 1.4, the risk-free rate is 5%, and the average return on the market is 14%, what will be the firm's cost of common equity using the CAPM approach? Round your answer to two decimal places. % If the firm's bonds earn a return of 13%, based on the bond-yield-plus-risk-premium approach, what will be rs? Use the midpoint of the risk premium range discussed in Section 10-5 in your calculations. Round your answer to two decimal places. % If you have equal confidence in the…
I need help on this question ASAP: Langkasuka Holdings expects to pay an annual dividend of $1.50 per share, and stock analysts expect the dividend to grow by 7% indefinitely. If Langkasuka Holdings current share price is $25, what would the required rate of return be?
Last year Artworks, Inc. paid a dividend of $1.75. You anticipate that the company’s growth rate is 6 percent and have a required rate of return of 9 percent for this type of equity investment. What is the maximum price you would be willing to pay for the stock? Could you answer in an equation form so i can see where the numbers are supposed to be plugged in
7. You are evaluating the purchase of T.P. Toys, Inc. Common stock that just paid a dividend of P1.80. You expect the dividend to grow at a rate of 12% indefinitely. You estimate that a required rate of return of 18% will be adequate compensation for this investment. Assuming that your analysis is correct, what is the most that you would be willing to pay for the common stock if you were to purchase it today? 8. MyBiibii Corp. Decided to undertake a large project. Consequently, there is a need for additonal funds. The finance manager plans to issue a 15% preferred stock to finance the project. The stock will have a par value of P50 per share. If investors’ required rate of return on this investment is currently at 18%, what should be the preferred stock market value? 9. You are considering the purchase of Ahlecs Company stock. You anticipate that the company will pay dividend of P2.25 per share next year and P2.50 per share the followiing year. You believe that you can sell the stock…
Suppose instead that the company is about to pay a dividend of $2.00 per share. You also learn that the company is expected to have net income of $100 million, dividends of $50 million, and total equity of $1.5 billion (and that these relationships are expected to be stable). If the relevant required rate of return is 10%, what is the intrinsic value per share of the company’s stock?
Mackenzie Company has a price of $31 and will issue a dividend of $2.00 next year. It has a beta of 1.5, the risk-free rate is 5.4%, and the market risk premium is estimated to be 4.8%. a. Estimate the equity cost of capital for Mackenzie. b. Under the CDGM, at what rate do you need to expect Mackenzie's dividends to grow to get the same equity cost of capital as in part (a)?
An IPO is being offered for P10.00 per share. Much that you want to accept the offer, you want to know if it is fairly priced. Considering that you have a good idea of Free Cash Flow in determining the stock valuation. Based on the latest financial statements of the company, you were able to compute the free cash flow amounted to P300,000 for the current year. You project that for the next two years, this free cash flow will have a growth of 30%, and 20% for the last three years. Then it will maintain its normal growth rate of 10% to infinity. The weighted cost of capital is 15%. The market value of all long term debts totaled P2.0 million and a preferred stock valued at P1.25 million. The company wishes to issue 750,000 shares of common stock. Period PV factor Total Year 1 300,000 x 1.30 390,000 0.8696 339,144 Year 2 390,000 x 1.30 507,000 0.7561 383,342.7 Year 3 507,000 x 1.20 608,400 0.6575 400,023 Year 4 608,400 x 1.20 730,080…
Mackenzie Company has a price of $37 and will issue a dividend of $2.00 next year. It has a beta of 1.2, the risk-free rate is 5.4%, and the market risk premium is estimated to be 4.8%. a. Estimate the equity cost of capital for Mackenzie. b. Under the CDGM, at what rate do you need to expect Mackenzie's dividends to grow to get the same equity cost of capital as in part (a)? a. Estimate the equity cost of capital for Mackenzie. The equity cost of capital for Mackenzie is %. (Round to two decimal places.) b. Under the CGDM, at what rate do you need to expect Mackenzie's dividends to grow to get the same equity cost of capital as in part (a)? The expected growth rate for dividends is | %. (Round to two decimal places.)
Mackenzie Company has a price of $32 and will issue a dividend of $2.00 next year. It has a beta of 1.1, the risk-free rate is 5.9%, and the market risk premium is estimated to be 4.8%. a. Estimate the equity cost of capital for Mackenzie. b. Under the CDGM, at what rate do you need to expect Mackenzie's dividends to grow to get the same equity cost of capital as in part (a)? a. Estimate the equity cost of capital for Mackenzie. The equity cost of capital for Mackenzie is %. (Round to two decimal places.)

SEE MORE QUESTIONS

Recommended textbooks for you

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

SEE MORE TEXTBOOKS