Question
In: Finance
Your task is to value Shake Shack's (SHAK’s) stock. Shake Shack's dividends two, four, and five...
Your task is to value Shake Shack's (SHAK’s) stock. Shake Shack's dividends two, four, and five years from now are expected to be, respectively, $3.25, $4.10, and $4.50. (Shake Shack has announced that it’ll not pay any dividends at t=1 and t=3, instead using nearly all free cash to add restaurants across the country.) Across years 6 and 7 and 8, dividends will grow by 7%/year. The dividends are projected to grow, after that, at a constant rate of 3% forever. SHAK has a debt-to-equity ratio (in market-value terms) of 1.0. The yield to maturity on SHAK's bonds averages 4% and the company's tax rate is 30%. If the risk-free rate is 2.2%, the market risk premium is 6%, and SHAK's equity beta is 1.25, what should the stock sell for today based on a discounted valuation of its projected dividends?
Solutions
Expert Solution
cost of equity = 2.2% + 1.25*6% = 9.70%
WACC = (4%*0.7 + 9.70%)/2 = 6.25%
| Discount rate | 6.2500% | ||
| Cash flows | Year | Discounted CF= cash flows/(1+rate)^year | Cumulative cash flow |
| - | 0 | - | - |
| - | 1 | - | - |
| 3.250 | 2 | 2.88 | 2.88 |
| - | 3 | - | 2.88 |
| 4.100 | 4 | 3.22 | 6.10 |
| 4.500 | 5 | 3.32 | 9.42 |
| 4.815 | 6 | 3.35 | 12.77 |
| 5.152 | 7 | 3.37 | 16.14 |
| 163.280 | 7 | 106.81 | 122.95 |
price = 122.95
jeff jeffy answered 2 years agoRelated Solutions
Your task is to value Shake Shack's (SHAK’s) stock. Shake Shack's next dividend (i.e., the dividend...
Your task is to value Shake Shack's (SHAK’s) stock. Shake
Shack's next dividend (i.e., the dividend at t =
1) is expected to be $3.25. Across years 2 and 3 and 4, dividends
will grow by 7%/year. After that, dividends
are projected to grow at a constant rate of 3% forever. SHAK has a
debt-to-equity ratio (in market-value
terms) of 1.0. The yield to maturity on SHAK's bonds averages 4%
and the company's tax rate is 30%. If the
risk-free...
A stock is expected to pay the following dividends: $1.2 four years from now, $1.6 five...
A stock is expected to pay the following dividends: $1.2
four years from now, $1.6 five years from now,
and $1.8 six years from now, followed by growth in the
dividend of 5% per year forever after that point. There will be no
dividends prior to year 4. The stock's required return is 13%. The
stock's current price (Price at year 0) should be
$____________.
Your task is to find the value of a company stock. You have the following information:...
Your task is to find the value of a company stock. You have the
following information:
a) Investors expect 5 EUR
dividend next year.
b) Dividends are expected to stay constant for the next
four years.
c) However, dividends are expected to start growing
5% a year starting from year
5.
d) Expected return from investments with comparable risk is
15%.
Question:
1. Based on information above, what is the fundamentally
justified price of a stock?
2. You observe that...
Your task is to find the value of a company stock. You have the following information:...
Your task is to find the value of a company stock. You have the
following information:
a) Investors expect 10 EUR
dividend next week. Buying stock today entitles you to receive that
dividend
b) Dividends are expected to stay constant for the next
three years.
c) However, dividends are expected to start growing
3% a year starting from year
4.
d) Expected return from investments with comparable risk is
13%.
Question:
1. Based on information above, what is the fundamentally...
What is the value of a common stock if a. the firm's earnings and dividends are...
What is the value of a common stock if a. the firm's earnings
and dividends are growing annually at 20 percent, the current
dividend is $2.64, and investors require a 15 percent return on
investments in common stock? b. What is the value of this stock if
you add risk to the analysis and the firm's beta coefficient is
0.8, the risk-free rate is 9 percent, and the return on the market
is 15 percent? c. If the price of...
Equations concerning Stock: Present Value (Price) of Stock with constant dividends (**Preferred Stock): P =...
Equations concerning Stock:
Present Value (Price) of Stock with constant dividends
(**Preferred Stock):
P = D / r
Present Value(Price) of Stock with constant dividend growth
rates (**Common Stock)
P = D/ (r – g) ***D = reflects change in dividend
rate
Required return for the stock (**Common Stock)
r = D / P + g
Estimating future dividend growth (**Common Stock)
g = (P * r – D) / (P + D)
Keaubie Company has stock selling @...
Would a stock that pays no dividends have any value? What about a stock with negative...
Would a stock that pays no dividends have any value? What about
a stock with negative earnings (a negative P/E ratio)? What about a
company with negative free cash flow? What do you think?
What is the value of rights in a rights issue? Explain stock splits, stock dividends, equity...
What is the value of rights in
a rights issue? Explain stock splits, stock dividends, equity
dilution = issue-related terminology
A stock will pay no dividends for the next 3 years. Four years from now, the...
A stock will pay no dividends for the next 3 years. Four years
from now, the stock is expected to pay its first dividend in the
amount of $2.1. It is expected to pay a dividend of $2.9 exactly
five years from now. The dividend is expected to grow at a rate of
7% per year forever after that point. The required return on the
stock is 12%. The stock's estimated price per share exactly TWO
years from now, P2...
A stock will pay no dividends for the next 3 years. Four years from now, the...
A stock will pay no dividends for the next 3 years. Four years
from now, the stock is expected to pay its first dividend in the
amount of $2.1. It is expected to pay a dividend of $2.9 exactly
five years from now. The dividend is expected to grow at a rate of
5% per year forever after that point. The required return on the
stock is 14%. The stock's estimated price per share exactly TWO
years from now, P2...
ADVERTISEMENT
ADVERTISEMENT
Latest Questions
- Tidewater Company uses the product cost concept of applying the cost-plus approach to product pricing. The...
- Create 5 short-term plan of technology projects that you can perform outside of an I.T. department...
- Derek plans to retire on his 65th birthday. However, he plans to work part-time until he...
- Toady and Froggy were running a vegan cafe together. The business was having financial difficulties.Betelguese, who...
- 1. The following questions concern Jesse Gelsinger who suffered from partial OTC. a. In the...
- Pittman Company is a small but growing manufacturer of telecommunications equipment. The company has no sales...
- TzeMay was one of the first women engineering students at ABC University. She graduated in 1995...
ADVERTISEMENT