Part A

Assume that Bon Temps has a beta coefficient of $1\mathrm{.}3,$ that the risk$-$free rate $($the yield on T$-$bonds$)$ is $3\%,$ and

that the required rate of return on the market is $8\%.$ What is Bon Temps's required rate of return?

Part B

Assume that Bon Temps is a constant growth company whose last dividend $($DO$,$ which was paid yesterday$)$

was $$2\mathrm{.}10$ and whose dividend is expected to grow indefinitely at a $4\%$ rate. $(1)$ What is the firm's expected

dividend stream over the next $3$ years? $(2)$ What is its current stock price? $(3)$ What is the stock's expected

value one year from now? $(4)$ What are the expected dividend yield, capital gains yield, and total return

during the first year?

Part C

Now assume that the stock is currently selling at $$40\mathrm{.}00.$ What is its expected rate of return?

Part D

What would the stock price be if its dividends were expected to have zero growth?

Part E

Now assume that Bon Temps's dividend is expected to grow $30\%$ the first year, $20\%$ the second year, $10\%$

the third year, and return to its long$-$run constant growth rate of $4\%.$ What is the stock's value under these

conditions? What are its expected dividend and capital gains yields in Year $1?$ In Year $4?$

Part F

Suppose Bon Temps is expected to experience zero growth during the first $3$ years and then resume its

steady$-$state growth of $4\%$ in the fourth year. What would be its value then? What would be its expected

dividend and capital gains yields in Year $1?$ In Year $4?$

Part $G$

Finally, assume that Bon Temps's earnings and dividends are expected to decline at a constant rate of $4\%$

per year, that is$,g=-4\%.$ Why would anyone be willing to buy such a stock, and at what price should it

sell? What would be its dividend and capital gains yields in each year?

Part H

Suppose Bon Temps embarked on an aggressive expansion that requires additional capital. Management

decided to finance the expansion by borrowing $$40$ million and by halting dividend payments to increase

retained earnings. Its WACC is now $7\mathrm{.}5\%,$ and the projected free cash flows for the next $3$ years are $-$$$5$

million, $$10$ million, and $$20$ million. After Year $3,$ free cash flow is projected to grow at a constant $5\%.$ What

is Bon Temps's market value of operations? If it has $10$ million shares of stock, $$40$ million of debt and

preferred stock combined, and $$5$ million of nonoperating assets, what is the price per share?