Your boss, Sally Maloney, treasurer of Fred Clark Enterprises (FCE), asked you to help her estimate...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Your boss, Sally Maloney, treasurer of Fred Clark Enterprises (FCE), asked you to help her estimate the intrinsic value of the company's stock. FCE just paid a dividend of $1.00, and the stock now sells for $17.50 per share. Sally asked a number of security analysts what they believe FCE's future dividends will be, based on their analysis of the company. The consensus is that the dividend will be increased by 10% during Years 1 to 3, and it will be increased at a rate of 5% per year in Year 4 and thereafter. Sally asked you to use that information to estimate the required rate of return on the stock, rs, and she provided you with the following template for use in the analysis. Estimated rs = 10.00% Actual Market Price, Po: $17.50 Year Dividend growth rate (insert correct values) Calculated dividends (Do has been paid) HV3 = D4/(rs - 94). Find using Estimated rs. Total CFs PVS of CFs when discounted at Estimated rs Calculated Price = Po = Sum of PVs = a. 9.83% b. 13.97% c. 10.54% Od. 12.44% e. 11.84% (must be changed to force Calculated Price to equal the Actual Market Price) $0.00 0 $1.00 Rapid growth 1 10% ? 2 10% ? 3 10% ? ? ? ? ? Normal growth 4 5 5% ? 5% ? ? ? ? A positive number will be here when dividends are estimated. The Calculated Price will equal the Actual Market Price once the correct rs has been found. Sally told you that the growth rates in the template were just put in as a trial, and that you must replace them with the analysts' forecasted rates to get the correct forecasted dividends and then the estimated HV. She also notes that the estimated value for rs, at the top of the template, is also just a guess, and you must replace it with a value that will cause the Calculated Price shown at the bottom to equal the Actual Market Price. She suggests that, after you have put in the correct dividends, you can manually calculate the price, using a series of guesses as to the Estimated rs. The value of rs that causes the calculated price to equal the actual price is the correct one. She notes, though, that this trial-and-error process is quite tedious, and that the correct rs could be found much faster with a simple Excel model, especially if you use Goal Seek. What is the value of rs? Your boss, Sally Maloney, treasurer of Fred Clark Enterprises (FCE), asked you to help her estimate the intrinsic value of the company's stock. FCE just paid a dividend of $1.00, and the stock now sells for $17.50 per share. Sally asked a number of security analysts what they believe FCE's future dividends will be, based on their analysis of the company. The consensus is that the dividend will be increased by 10% during Years 1 to 3, and it will be increased at a rate of 5% per year in Year 4 and thereafter. Sally asked you to use that information to estimate the required rate of return on the stock, rs, and she provided you with the following template for use in the analysis. Estimated rs = 10.00% Actual Market Price, Po: $17.50 Year Dividend growth rate (insert correct values) Calculated dividends (Do has been paid) HV3 = D4/(rs - 94). Find using Estimated rs. Total CFs PVS of CFs when discounted at Estimated rs Calculated Price = Po = Sum of PVs = a. 9.83% b. 13.97% c. 10.54% Od. 12.44% e. 11.84% (must be changed to force Calculated Price to equal the Actual Market Price) $0.00 0 $1.00 Rapid growth 1 10% ? 2 10% ? 3 10% ? ? ? ? ? Normal growth 4 5 5% ? 5% ? ? ? ? A positive number will be here when dividends are estimated. The Calculated Price will equal the Actual Market Price once the correct rs has been found. Sally told you that the growth rates in the template were just put in as a trial, and that you must replace them with the analysts' forecasted rates to get the correct forecasted dividends and then the estimated HV. She also notes that the estimated value for rs, at the top of the template, is also just a guess, and you must replace it with a value that will cause the Calculated Price shown at the bottom to equal the Actual Market Price. She suggests that, after you have put in the correct dividends, you can manually calculate the price, using a series of guesses as to the Estimated rs. The value of rs that causes the calculated price to equal the actual price is the correct one. She notes, though, that this trial-and-error process is quite tedious, and that the correct rs could be found much faster with a simple Excel model, especially if you use Goal Seek. What is the value of rs?
Expert Answer:
Answer rating: 100% (QA)
The detailed answer for the above question is provided below Prese... View the full answer
Related Book For
Corporate Finance A Focused Approach
ISBN: 978-1305637108
6th edition
Authors: Michael C. Ehrhardt, Eugene F. Brigham
Posted Date:
Students also viewed these finance questions
-
1. Hannah is applying for a life policy on her girlfriend Sarahs life. The policy is $500,000 and carries a large premium. Hannah is the main earner, so she is concerned about not being able to pay...
-
A bond just purchased pays annual interest of 10 percent. In seven years it matures at its face value of $25,000. What price was paid if current yields on a bond of this risk are 8.5 percent? 2. A...
-
Case Study MysteryLab Inc: Producing Gaming Chairs to Match the Game Introduction This case is designed to assist the student to better understand how absorption costing, costvolume-profit analysis,...
-
Income statements for the current year and one year ago follow. Assume that all sales are on credit. For Year Ended December 31 Sales Cost of goods sold Other operating expenses Interest expense...
-
Calculating the materials usage variance Stella Minten manages the Sweet Candy Shop, which was expected to sell 4,000 servings of its trademark candy during July . Each serving was expected to...
-
Solve the systems in Problems \(40-57\) by the Gauss-Jordan method. \(\left\{\begin{array}{l}x+2 z=13 \\ 2 x+y=8 \\ -2 y+9 z=41\end{array}ight.\)
-
The Korvette concept was started and run by one person and his group of friends. How could its failure have been avoided? Was the problem one of strategy (overexpansion), or was it organizational?...
-
Gundy Company expects to produce 1,200,000 units of Product XX in 2014. Monthly production is expected to range from 80,000 to 120,000 units. Budgeted variable manufacturing costs per unit are direct...
-
Let's use this discussion to discuss any problems you are having with the material as you prepare for the final exam. We're also going to use the discussion to complete a required activity with your...
-
Review "Forecasting Case Study: Urban Planning" for this topic's case study, in which you will serve as an urban planner forecasting economic growth and decline for a specific industry in your city....
-
Please analyse and compare the following 3 types of retailers used by Samsung in Canada from a marketing professional perspective: large chain shops such as Future Shop / Best Buy, large merchants...
-
One of Marco's employees will work four days at the end of this month and will be paid during next month's pay period. The employee makes $200 a day for an eight-hour work day. At the end of the...
-
How does cultural intelligence go beyond the commonly discussed topics of language, traditions, and so on? What are some deeper, systemic elements of cultural differences?
-
PART 1 - Incremental Analysis Gagandeep Corporation manufactures basketballs. Currently they have capacity to produce 15,000 basketballs during the quarter. Gagandeep Corp. receives a special order...
-
Can you expound upon the intricacies of the Shortest Job Next (SJN) scheduling algorithm, highlighting its role in minimizing average waiting time and its implications on overall system performance?
-
How will attending the DVAA benefit your agency or department as a whole?
-
? CoStar Group (NASDAQ:CSGP) is a stock listed on NASDAQ exchange. You will consider the time-period and daily share price of the company for the period 1st of February 2021 until 10th of August...
-
Splitting hairs, if you shine a beam of colored light to a friend above in a high tower, will the color of light your friend receives be the same color you send? Explain.
-
Refer to Problem 12-1. Return to the assumption that the company had $5 million in assets at the end of 2016, but now assume that the company pays no dividends. Under these assumptions, what would be...
-
What is a firm's fundamental value (which is also called its intrinsic value)? What might cause a firm's intrinsic value to be different from its actual market value?
-
What are the nominal and effective costs of trade credit under the credit terms of 3 15, net 30? Discuss.
-
A probability experiment consists of rolling a single fair die. (a) Identify the outcomes of the probability experiment. (b) Determine the sample space. (c) Define the event E = roll an even number....
-
A pair of fair dice is rolled. Fair die are die where each outcome is equally likely. (a) Compute the probability of rolling a seven. (b) Compute the probability of rolling snake eyes; that is,...
-
Our number system consists of the digits 0, 1, 2, 3, 4, 5, 6, 7, 8, and 9. Because we do not write numbers such as 12 as 012, the first significant digit in any number must be 1, 2, 3, 4, 5, 6, 7, 8,...
Study smarter with the SolutionInn App