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Balthrop Co. is a new education consulting firm that just paid its annual dividend of $1.00...

  1. Balthrop Co. is a new education consulting firm that just paid its annual dividend of $1.00 yesterday. Analysts believe that due to a special one-time boost in revenue, the following year’s dividend (t=1) will be $3.50. Dividends will decline at a 30% rate for 2 years, after which point they will grow at a steady rate of 3% forever. Similar firms in the industry have a 20% cost of capital associated with them.

  2. Balthrop Co. is a new education consulting firm that just paid its annual dividend of $1.00 yesterday. Analysts believe that due to a special one-time boost in revenue, the following year’s dividend (t=1) will be $3.50. Dividends will decline at a 30% rate for 2 years, after which point they will grow at a steady rate of 3% forever. Similar firms in the industry have a 20% cost of capital associated with them. \

  3. QUESTION starts below Using the same information as in parts 1 and 2, and the calculated share price from part 2:

You are offered the chance to buy shares in Balthrop Co. for $11.75 per share. Should you purchase shares? Would your answer change if you felt Balthrop Co. would have a 10% cost of capital? Why/why not?

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Ans

If Cost of Capital is 20%

page 1

page 2

If Cost of Capital is 10%

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page 2

jeff jeffy answered 1 year ago
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