MPPR currently trades for $40.Earnings next year are expected to be $6. The company has a...

MPPR currently trades for $40.Earnings next year are expected to be $6. The company has a ROE of 10% and pays out half of its earnings as dividends. Earnings are expected to grow at the sustainable long term growth rate. The stock has a beta of 1.5, and the risk free rate is 4%. The market risk premium is 5%.

a. According to the Gordon Growth Model, what is the markets implied rate for MPPR?

b. Use CAPM to estimate the cost to equity for MPPR and compare it to the implied discount rate found in (a). Does your CAPM estimate of the discount rate imply that MPPR is over or under period?

c. Using the markets implied rate as your discount rate, find the intrinsic value of MPPR using the Gordons growth Model and decomposes intrinsic value into Non growth value and Present Value of Growth Opportunities. What does your answer suggest about the company’s dividend policy?

FEEL FREE TO USE EXCEL BUT PLEASE SHOW THE FORMULAS

Solutions

Expert Solution

jeff jeffy answered 7 months ago

Next > < Previous

Related Solutions

1. Richards Inc. stock currently trades for $40, but you believe the company's earnings will decrease...

1. Richards Inc. stock currently trades for $40, but you believe the company's earnings will decrease dramatically in the next six months which in turn will cause the company's stock to depreciate. Six-month European call options on the stock have an exercise price of $45 and a premium of .75. The annual risk free rate is 3%. You want to create a portfolio that mimics the payoff of owning a 6-month European put on on the stock. Which of the...

Richards Inc. stock currently trades for $40, but you believe the company's earnings will decrease dramatically...

Richards Inc. stock currently trades for $40, but you believe the company's earnings will decrease dramatically in the next six months which in turn will cause the company's stock to depreciate. Six-month European call options on the stock have an exercise price of $45 and a premium of .75. The annual risk free rate is 3%. You want to create a portfolio that mimics the payoff of owning a 6-month European put on on the stock. Which of the following...

A company is expected to have earnings of $3.37 per share next year, $4.65 in two...

A company is expected to have earnings of $3.37 per share next year, $4.65 in two years, and $5.23 in three years. The dividend payout ratio is expected to remain at 20% over the next three years. You estimate the risk-free rate to be 4% per year and the expected market risk premium to be 5% per year. In two years, you expect the leading PE ratio to be 11. The beta of the stock is 1.1. What would be...

A company is expected to have earnings of $3.46 per share next year, $4.19 in two...

A company is expected to have earnings of $3.46 per share next year, $4.19 in two years, and $5.58 in three years. The dividend payout ratio is expected to remain at 40% over the next three years. You estimate the risk-free rate to be 5% per year and the expected market risk premium to be 6% per year. In two years, you expect the lagging PE ratio to be 14. The beta of the stock is 0.7. What would be...

A company is issuing a 6-year maturity bond that is expected to pay $40 annually and...

A company is issuing a 6-year maturity bond that is expected to pay $40 annually and a lump sum of $1000 at the end of six-year from now. If bond investors require 9% annual nominal interest rate (APR) but the interest rate is compounded quarterly, how much is the price of this bond today? Please show your formula in your answer and explain step-by-step calculation to arrive to your final answer.

Earnings per common share of ABC Industries for the next year are expected to be $2.25...

Earnings per common share of ABC Industries for the next year are expected to be $2.25 and to grow 7.5% per year over the next 4 years. At the end of the 5 years, earnings growth rate is expected to fall to 6.25% and continue at that rate for the foreseeable future. ABC’s dividend payout ratio is 40%. If the expected return on ABC's common shares is 18.5%, calculate the current share price. (Round your answer to the nearest cent.)...

X Company is considering buying a part next year that it currently makes. A company has...

X Company is considering buying a part next year that it currently makes. A company has offered to supply this part for $15.34 per unit. This year's total production costs for 59,000 units were: Materials 300,900 Direct Labor 241,900 Total overhead 383,500 $265,500 of X Company's total overhead costs were variable; $34,220 of X Company's fixed overhead costs can be avoided if it buys the part. If X Company buys the part, there are no alternative uses of the resources...

X Company is considering buying a part next year that it currently makes. A company has...

X Company is considering buying a part next year that it currently makes. A company has offered to supply this part for $17.18 per unit. This year's total production costs for 57,000 units were: Materials $387,600 Direct labor 285,000 Total overhead 290,700 $205,200 of X Company's total overhead costs were variable; $24,795 of X Company's fixed overhead costs can be avoided if it buys the part. If X Company buys the part, there are no alternative uses of the resources...

X Company is considering buying a part next year that it currently makes. A company has...

X Company is considering buying a part next year that it currently makes. A company has offered to supply this part for $14.90 per unit. This year's total production costs for 53,000 units were: Materials $275,600 Direct labor 275,600 Total overhead 206,700 $132,500 of X Company's total overhead costs were variable; $27,454 of X Company's fixed overhead costs can be avoided if it buys the part. If X Company buys the part, there are no alternative uses of the resources...

X Company is considering buying a part next year that it currently makes. A company has...

X Company is considering buying a part next year that it currently makes. A company has offered to supply this part for $16.67 per unit. This year's total production costs for 60,000 units were: Materials $384,000 Direct labor 330,000 Total overhead 234,000 $168,000 of X Company's total overhead costs were variable; $16,500 of X Company's fixed overhead costs can be avoided if it buys the part. If X Company buys the part, there are no alternative uses of the resources...

Subjects