Corporate Finance Study Notes

($372 + $135 + 500) / ($2.21 - ($0.83 + .40)) = 1,028 [+/- 31]

= 5.0% + 8.4% = 13.4%. DCF (Direct Cash Flow) = 13.6 DC+ RP = 12.3

b) What will be the total equity value and equity price per share after the issuance is completed?

-Martin Industries just paid an annual dividend of $1.30 a share. The market price of the stock is $36.80 and the growth rate is 6.0 percent. What is the firm's cost of equity?

The current year is 1979, so from Exhibit 3 the 1980 dividend is forecasted to be $1.70, and the stock price in 1979 is $22.50. This gives a dividend yield of 7.56%, which is added to g. There are four ways to solve for g:

Dividends were assumed to grow at the geometric average of the last 6 years, 20.28%. P0 = D2 Dn Pn D1 + + ··· + + 1 2 n (1 + Ke ) (1 + Ke ) (1 + Ke ) (1 + Ke )n $1.58 $2.28 $87.31 $1.31 + + ··· + + = 1 2 4 (1 + 7.0%) (1 + 7.0%) (1 + 7.0%) (1 + 7.0%)4 = $72.53

23) Danroy Inc has announced a $5 dividend. If Danroy's last price while trading cum-dividend is $65, what should its first ex-dividend price be (assuming perfect capital markets)?

For g, we are given that the dividend has grown from $0.82 to $1.20 in four years. We use the compound interest formula to get the growth rate

$10,644,800 / $2,271,400 = 4.69 Times Return on Common Stockholders’ Equity (2002) $647,645 / $1,928,960 = 33.58% Return

• Pe = D1/(re – g) = 700 / (0.11 – 0.05) = $11,667 • price per share = $11,667 / 1,000 = $11.67 3. Same facts as (2) above, except the 5% income growth rate (and beginning of year common equity to support it) are only expected for years 2 and 3. Then growth is expected to be zero and all income is expected to be distributed to shareholders for all future years. a. Compute D1, D2, D3, and Dt for all future years. • Keeping in mind that income is $1,100 in year 1, increases by 5% in years 2 and 3, and then remains constant for all future years; and keeping in mind that beginning of year 1 common equity is $8,000, increases by 5% at the beginning of year 2 and at the beginning of year 3, but does not increase at the beginning of year 4 and remains constant from that point forward, you should be able to compute: D1 = $700, D2 = $735, and Dt = 1,212.75 for D3 and all future years. b. Use the dividend discount (i.e., free cash flow to equity investors) valuation model to estimate the company’s current stock price. Pe = 700/(1+ 0.11) + 735/(1+ 0.11)2 + [1,212.75/0.11]/(1+ 0.11)2 = $10,175.31 and the price per share of common stock = $10,175.31 / 1,000 = $10.18. 4. Same facts as (3) above, except the growth rates are 5% for years 2 and 3 and then 3% perpetually for all future years. a. Compute D1, D2, D3 and the growth in D for all future years. • Keeping in mind that income is $1,100 in year 1, increases by 5% in years 2

24,675 = (18% x 1175 x 1.5 x base wage rate) + (82% x 1175 x base wage rate)

As in any recession, returns are more than likely to be lower than an average time in economic history, but a constant state at below average can cause returns to decline. Investment returns are the measure used to compare the efficiency of different investments and their actions, which takes the investment view of cash flow after an investment action (Brigham & Ehrdardt, 2014). Return on Investments (ROI) does not measure risk, so the figures of ROI alone are not sufficient without measuring uncertainty. With American Foam, the increase in return rates are more likely to happen in a recession or when the state of economy is above average or in a boom. The best case scenario would be for American Foam would be to perform above average where the estimated Rate of Return would be 45%, in comparison to the worst case scenario at a below average economic state where the return would be a negative 10% rate of return which is far below that of the average. The return on a $1000 investment that is sold for $1,100 would be set up as follows: Rate of Return = Amount received- Amount invested / Amount invested. This would in turn look like ($1100-$1000)/ $1000= $100/$1000= 0.10= 10% ROI. As a finance coordinator, in the recession, the best case scenario would be a 10% return which is what is expected from the ROI calculations. In this case I would recommend

Read Daktronics (F): Weathering the Recession Positioned for a Bright Future (Taylor et al.) found in your casepack and and use only the information found therein to answer the questions.

The standard method of calculating a stock price using the perpetual dividend growth model is done by assessing a company’s dividend one year into the future adding the future expected growth rate. The formula is written as: P0 = D1/(Ke − g), where Ke is the investor required return, D1 is next year’s dividend and g is the

The impact of Interest rate, Inflation rate, and Gross Domestic Product, on Economic Growth Rate