Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)
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Chapter 9, Problem 9DQ
Summary Introduction

To identify: The average annual dividend growth rate. Whether, the constant growth rate model of dividend is better than the non-constant dividend model for proxy of intrinsic value. If not, indicate the use of non-constant dividend model for estimation of intrinsic value.

Introduction:

Average Annual Dividend Growth Rate: It refers to the average of the dividend growth rate for the past few years. It is calculated when the company has no fixed dividend growth rate per year.

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You are interested in determining the intrinsic value of Hoffman Inc.  Your analysis shows that the firm’s growth rate will drop from its current pace by 20% each of the next two years, and then you estimate that dividends will continue to grow at the year 2 rate, with the same dividend policy in place, indefinitely.  Lastly, your estimate of the required return on the firm’s equity is 12%.  Hoffman’s recently published annual report shows the following financial relationships: Assets = 1.4 x Equity Current Assets = 1.7 x Current Liabilities Sales = 1.5 x Assets Net Income = 8% x Sales Dividends = 30% x Net Income Earnings per share (Basic) = $0.80 per share Required:   Use the multi-period DDM to estimate the intrinsic value of the company’s stock now, at the beginning of year 1.
You are interested in determining the intrinsic value of Hoffman Inc.  Your analysis shows that the firm’s growth rate will drop from its current pace by 20% each of the next two years, and then you estimate that dividends will continue to grow at the year 2 rate, with the same dividend policy in place, indefinitely.  Lastly, your estimate of the required return on the firm’s equity is 12%.  Hoffman’s recently published annual report shows the following financial relationships: Assets = 1.4 x Equity Current Assets = 1.7 x Current Liabilities Sales = 1.5 x Assets Net Income = 8% x Sales Dividends = 30% x Net Income Earnings per share (Basic) = $0.80 per share Required:   If all of your expectations remain as shown, except that, on the last day of year 1, the required return decreases by 1%. What would be your holding period return for the year?
According to analysts, the growth rate in dividends for Acevedo for the previous 10 years has been 4%. If investors feel this growth rate will continue, what is the required return for the companys stock?

Chapter 9 Solutions

Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)

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