Question

In: Finance

(1) You have decided to expand the size of your business and will require $4,775,000 to...

(1)
You have decided to expand the size of your business and will require $4,775,000 to complete the expansion. Using the information below, how many shares would you have to sell to raise the necessary funds (please round up to the nearest whole number):

  • You plan to sell the shares today and anticipate that you will not be able to pay any dividends until exactly 7 years from today;
  • That first dividend will be $1.70 per share;
  • The value of the dividends will subsequently decline at 4% p.a. for the next 3 years, after which they will grow at 3.5% p.a. in perpetuity; and,
  • Dividends are paid annually, and the required rate of return on equity is 0.2605644517% per fortnight.

Solutions

Expert Solution

required rate of return annual fortnightly rate*12*2 .2605644517%*2*12 6.25%
Year expected dividend = dividend in year 8*(1+growth rate)^n n =1,2,3,4
8 1.7 1.7
9 1.7*(1-0.04)^1 1.632
10 1.7*(1-0.04)^2 1.56672
11 1.7*(1-0.04)^3 1.5040512
12 1.5040*1.035^1 1.55664
Horizon value in year 2011 =expected dividend in year 12/(required rate of return-growth rate) 1.55664/(6.25%-3.5%) 56.61
Year cash flow present value factor at 6.25% =1/(1+r)^n r =6.25% n=8,9,10,11 present value of cash flow = cash flow*present value factor
8 1.7 1.046688401
9 1.632 0.945713755
10 1.56672 0.854480193
11 1.5040512 0.772047986
11 56.61 29.05608961
Intrinsic value of stock =sum of present value of cash flow 32.68
No. of shares needed to sell to acquire the necesarry funds amount required/value of share 4,775,000/32.68 146114

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