La Vida Loca Corp. has been growing at a rate of 2% per year, and it expects this growth rate in earnings and dividends to continue for another year. The last dividend paid was $2, and the current required rate of return on equity is 10%.

1. If the market expects the company to grow at 4% a year after the next year, what would the stock price be today?

2. La Vida Loca Corp. is evaluating financing an investment by issuing equity today. The value of the investment to be financed is $10 million. How many additional shares does the company have to issue to finance this investment through equity?

3. The CEO of the company is pessimistic about the economy entering a recession. He believes that the company will only be able to grow at 2% per year for the next 4 years (afterward, he also believes that the company will grow by 4% a year). How much will the stock price fall next year if his beliefs materialize?

4. If the company decides to finance its project by issuing equity today, how would a recession affect the amount of money received by the company through issuing equity? How would your answer change if the company decides to finance the investment by issuing short-term bonds and rolling over its debt for the next 5 years? Explain

Answer rating: 100% (QA)

1 Stock Price Today with 4 Growth After Next Year Calculate the expected dividend next year using the current growth rate 2 Calculate the stock price ... View the full answer