Question

In: Finance

Star Corp has 5 million shares outstanding and no growth opportunities. It just paid a dividend...

Star Corp has 5 million shares outstanding and no growth opportunities. It just paid a dividend of $6 per share and has a market value of $62.5 million.

a. What is the discount rate on Star’s stock?

b. The firm has an opportunity to invest in a new project. The project requires an additional investment of $1.2 million today and will generate additional earnings in the next 10 years. The first earnings amount of $0.3 million will begin one year from now and grow at 4% each year thereafter (until year 10). Assuming no taxes, calculate the NPV of the new project.

c. What will the stock price be if the firm undertakes the new project?

Expert Solution

Question a:

D = Dividend = $6

P0 = Current Share Price = $62.5 million / 5 million = $12.5

Discount rate on Star's stock = D / P0

= $6 / $12.5

= 0.48

= 48%

Question b:

Initial Investment = $1.2 million

P = First earnings = $0.3 million

g = growth rate = 4%

r = discount rate = 48%

Present Value of earnings = [P / (r-g)] * [1 - [(1+g)/(1+r)]^n]

= [$0.3 million / (48%-4%)] * [1 - [(1+4%)/(1+48%)]^10]

= 0.681818182 million * 0.97042691

= $0.661801835 million

= $0.66 million

NPV of new project = Present value of earnings - Initial investment

= $0.66 million - $1.2 million

= -$0.54 million

Therefore, NPV of the Project is -$0.54 million

Question c:

New market value = Market value + NPV of the Project

= $62.5 million - $0.54 million

= $61.96 million

Stock price if firm undertakes the project = New market value after the project / Number of shares

= $61.96 million / 5 million

= $12.392

Therefore, stock price if firm undertakes the project is $12.39

jeff jeffy answered 2 years ago

XYZ just paid a dividend of $ 2.65 on its shares. The dividend growth rate is...

XYZ just paid a dividend of $ 2.65 on its shares. The dividend growth rate is expected to be constant 4% per annum forever. Investors demand a return of 16% for the first three years, a return of 14% for the next three years and a return of 11% thereafter. What is the current price of this financial instrument?

Farms Corp. just paid a dividend of $3.20 on its stock. The growth rate in dividends...

Farms Corp. just paid a dividend of $3.20 on its stock. The growth rate in dividends is expected to be a constant 5 percent per year indefinitely. Investors require a 15 percent return on the stock for the first three years, a 13 percent return for the next three years, and an 11 percent return thereafter. What is the current share price? Please provide some basic explanations for the calculations. There are similar questions already answered but with no explanation...

ABC Corp.. just paid a dividend of $2.50 on its stock. The growth rate in dividends...

ABC Corp.. just paid a dividend of $2.50 on its stock. The growth rate in dividends is expected to be a constant 5 percent per year, indefinitely. Investors require a 13 percent return on the stock for the first three years, 11 percent return for the next five years, and then a 9 percent return thereafter. Determine the price of the stock at the end of Year 5? Determine the price of the stock at the end of Year 4?...

Recently, David Corporation has paid $3 dividend for each of the outstanding shares. The dividend is...

Recently, David Corporation has paid $3 dividend for each of the outstanding shares. The dividend is expected to be increased at 2% for the next three years, after which the dividend would be increased by 5% per year forever. If the required return of the share is at 10%, what is the value of a share currently?

Google currently has a 5 million common shares outstanding, and a 1 million preferred shares outstanding,...

Google currently has a 5 million common shares outstanding, and a 1 million preferred shares outstanding, and 100,000 bonds outstanding. Calculate Google Weighted Average Cost of Capital (WACC) if the corporate tax rate is 35%. (Using excel and making formulas viewable) The average cost of equity of Google is 19.04%. The cost of Google’s preferred stocks if it is currently priced at $100 is 6%. The pre-tax cost of debt of Google is 6.85%.

XYZ Inc. just paid a dividend of $2.50 per share on 100,000 shares outstanding. Dividends are...

XYZ Inc. just paid a dividend of $2.50 per share on 100,000 shares outstanding. Dividends are expected to grow at a constant rate indefinitely. The firm’s ROE is 12 percent, beta is 1.2 and the dividend payout ratio is 45 percent. Treasury notes are yielding 2.75 percent and the market risk premium is estimated at 7.25 percent. The firm has 50,000 bonds outstanding that will mature in 5 years. The bonds are quoted at 107 percent of par and pay...

Jenny hold 1000 shares of C corp. The C corp. has 12 million shares outstanding. The...

Jenny hold 1000 shares of C corp. The C corp. has 12 million shares outstanding. The value of assets of the C corp. is $400 million which includes $50 millions of cash. The C corp. is expected to pay $40 million as dividend. What Jenney should do if she needs a dividend of $4,900?

KF Enterprises has 8 million shares outstanding at a current price of $45/share. KF just paid...

KF Enterprises has 8 million shares outstanding at a current price of $45/share. KF just paid a dividend of $1.35 and dividends are expected to continue growing at 5%. It has two bond issues as follows: 10,000 bonds of Issue A: A 20 year, semiannual 4.5% bond was issued 7 years ago and is currently selling at 97.3% of par. 15,000 bonds of Issue B: A 15 year zero coupon bond was issued 3 years ago, and is currently selling...

No. of shares issued: 80 million Current price per share: $1.20 Dividend just paid: $0.06 Dividend...

No. of shares issued: 80 million Current price per share: $1.20 Dividend just paid: $0.06 Dividend growth rate: 5% per annum No. of bonds issued: 50,000 Par value of each bond: $1,000 Coupon rate: 5% Current yield to maturity: 4.5% Time to maturity: 3 years Market data: 10-year government bond yield: 2% Equity risk premium: 5% Corporate tax rate: 20% (a) Employ the dividend growth model to determine FLG’s cost of equity. (b) Use the capital asset pricing model (CAPM)...

Dinklage Corp. has 5 million shares of common stock outstanding. The current share price is $71,...

Dinklage Corp. has 5 million shares of common stock outstanding. The current share price is $71, and the book value per share is $10. The company also has two bond issues outstanding. The first bond issue has a face value of $80 million, a coupon rate of 4 percent, and sells for 96 percent of par. The second issue has a face value of $65 million, a coupon rate of 3 percent, and sells for 108 percent of par. The...