Finance; Stock Valuation
posted by Tina .
Early in 2007, Inez Marcus, the chief financial officer for Suarez Manufacturing, ws given the task of assessing the impact of a proposed risky investment on the firm's stock value. To perform the necessary analysis, Inez gathered the following information on the firm's stock.
During the immediate past 5 years (2002  2006), the annual dividends paid on the firm's common stock were as follows:
Year Dividend per share
2006 $1.90
2005 $1.70
2004 $1.55
2003 $1.40
2002 $1.30
The firm expects that without the proposed investment, the dividend in 2007 will be $2.09 per share and the historical annual rate of growth (rounded to the nearest whole percent) will continue in the future. Currently, the required return on the common stock is 14%. Inez's research indicates that if the proposed investment is undertaken, the 2007 dividend will rise to $2.15 per share and the annual rate of dividend growth will increase to 13%. She feels that in the best case, the dividend would continue to grow at this rate each year into the future and that in the worst case, the 13% annual rate of growth in dividends would continue only through 2009, and then, at the beginning of 2010, would return to the rate that was experienced between 2002, and 2006. As a result of the increased risk associated with the proposed risky investment, the required return on the common stock is expected to increase by 2% to an annual rate of 16%, regardless of which dividend growth outcome occurs.
Armed with the preceding information, Inez must now assess the impact of the proposed risky investment on the market value of Suarez's stock. To simplify her calculations, she plans to round the historical trowht rate in common stock dividends to the nearest whole percent.
a. Find the current value per share of Suarez Manufacturing's common stock.
B. Find the value of Suarez's common stock in the event that it undertakes the proposed risky investment and assuming that the dividend growth rate stays at 13% forever. Compare this value to that found in part a. What effect would the proposed inveestment have on the firm's stockholders? Explain.
C. On the basis of your findings in part b, do the stockholders win or lose as a result of undertaking the proposed risky investment? Should the firm do it? Why?
D. Rework part b and c assuming that at the beginning of 2010 the annual dividend growth rate returns to the rate experienced between 2002 and 2006.
I know it's a long question, but I need help. Ok. for problem a, I know that formula for price of a share is:
Dividend / required return  growth rate.
So when it's asking for current value, which is 2007, it would be
$2.09 / 0.14  .158
Then, I get a negative number.
Did I get the growth rate right?
$2.09  $1.30 / 5
Help plz...
Respond to this Question
Similar Questions

Finance and Investment
What is the value of a common stock if: a) If earnings and dividends are growing annually at 10%, the current dividend is $1.32 and investors require a 15% return on investmenets in common stock? 
MANAGERIAL FINANCE. Please help
Hi, I have some questions about managerial finance. I do not really understand them so can u plz help me out!! Thx Here are the questions: 1. High earnings per share (EPS) do not necessarily translate into a high fundamental stock … 
managerial finance
Early in 2007, Inez Marcus, the chief financial officer for Suarez Manufacturing, ws given the task of assessing the impact of a proposed risky investment on the firm's stock value. To perform the necessary analysis, Inez gathered … 
Finance
You are currently only invested in the Natasha Fund (aside from riskfree securities). It has an expected return of 14% with a volatility of 20%. Currently, the riskfree rate of interest of 3.8%. Your broker suggests that you add … 
fin571
B1. (Choosing financial targets) Bixton Company’s new chief financial officer is evaluating Bixton’s capital structure. She is concerned that the firm might be underleveraged, even though the firm has largerthanaverage research … 
Finance
Emerson Electric common stock is selling for $36.75. par value is $5. stock recently paid $1.32 in dividend and the firm's earnings per share increased from $1.49 to $3.06 in the past 5 years. The firm expects to grow at the same rate … 
Busniness Finance
I am having some difficulties with week four lab. The explanation for problem skips a step and I do not know how to get the answer. (Weighted average cost of capital). As a member of the Finance Department of Ranch Manufacturing, your … 
Finance
A firm has $3 million market value and it sells preferred stock with a par value of $100. If the coupon rate on the preferred stock is 9% and the preferred stock trades at $95, what is the cost of preferred stock financing? 
finance
You have finally saved 10,000 and are ready to make your first investment. You have the three following alternatives for investing that money: 1) Captial cities ABC Inc. bonds with a par value of $1000 that pays an 8.75 percent on … 
Managerial Finance
A firm has an issue of preferred stock outstanding that has a par value of $100 and a 4% dividend. If the current market price of the preferred stock is $50, the yield on the preferred stock is