Solution based on financial management

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This is a finance solution on financial management. For finance homework help, please visit our website http://www.assignmentstore.com

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Solution based on financial management

  1. 1. Solution based on Financial Management:ABC Corporation started business in 2005. The growth rate for the first 4 years wasexceptional i.e. 25% per year. After the fourth year the growth rate became constant at6 percent. The treasury bills offer 5%, while market offers on investment equal 12%.The beta for the company is 0.85. Investment consists of $35 million, and equityconsists of 8 million preferred stocks and 19million common stocks. The latestdividend issued was $4 . The free cash flow stream for the last 5 years have been -2million, 3 million. 3.5million, 5 million and 10million. The company paid taxes at therate of 35% on its a) Calculate the stock value for year-1 using the discounted dividend model. b) What is the dividend yield and capital gains yield. Is the stock value that you get by using Discounted Dividend model different from the value obtained using Corporate Valuation Model?Solution:a) We have g1-4 = 25%, g = 6%, rF = 5%, rM = 12%, β = 0.85, D0 = $4According to CAPM, the required return isk = rF + β (rM – rF) = 5% + 0.85 (12% - 5%) = 5% + 5.95% = 10.95%Expected dividend for year 1, D1 = D0 (1 + g) = $4 (1.25) = $5Expected dividend for year 2, D2 = D1 (1 + g) = $5 (1.25) = $6.25Expected dividend for year 3, D3 = D2 (1 + g) = $6.25 (1.25)
  2. 2. = $7.81Expected dividend for year 4, D4 = D4 (1 + g) = $7.81 (1.25) = $9.77Expected dividend for year 5, D5 = D5 (1 + g) = $9.77 (1.06) = $10.35P5 = D5/ (k – g) = $10.35/ (0.1095 – 0.06) = $209.09Value of stock, P1 = D2 / (1 + k) 2 + D3/ (1 + k) 3 + D4/ (1 + k) 4 + P4/ (1 + k) 5 = $6.25/1.10952 + $7.81/1.10953 + $9.77/1.10954 +$209.09/1.10955 = $141.61b) P0 = D1/ (1 + k) + $141.61 = $5/1.1095 + $141.61 = $146.12Dividend yield = D0/P = $4/$146.12 = 2.74%Capital gain yield = (P1 – P0)/P0 = ($146.12 – $141.61)/$141.61 = 0.0318 or 3.18%Click here for Finance Assignment Help

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