You are an investment adviser. One of your clients approaches you for your advice on investing in equity shares of Alpha Company. You have collected the following data: Earnings per share last year $5.00 Payout ratio 0.30 Return on equity 0.30 Cost of equity capital 0.25 The company plans to increase the payout ratio to 40% from year 6. Required: i) Estimate the price of an equity share of this company using an appropriate dividend discount model and advise your client whether they should buy a share of the company. ii) Your client is keen to know whether there are any positive growth opportunities from their investment. Explain to your client the meaning of this concept using appropriate calculations.

You are an investment adviser. One of your clients approaches you for your advice on investing in equity shares of Alpha Company. You have collected the following data: Earnings per share last year $5.00 Payout ratio 0.30 Return on equity 0.30 Cost of equity capital 0.25 The company plans to increase the payout ratio to 40% from year 6. Required: i) Estimate the price of an equity share of this company using an appropriate dividend discount model and advise your client whether they should buy a share of the company. ii) Your client is keen to know whether there are any positive growth opportunities from their investment. Explain to your client the meaning of this concept using appropriate calculations.

Managerial Accounting: The Cornerstone of Business Decision-Making

7th Edition

ISBN:9781337115773

Author:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger

Publisher:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger

Chapter15: Financial Statement Analysis

Section: Chapter Questions

Problem 66P

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You are an investment adviser. One of your clients approaches you for your advice on investing in equity shares of Alpha Company. You have collected the following data: Earnings per share last year $4.00 Payout ratio 0.40 Return on equity 0.25 Cost of equity capital 0.20 The company plans to increase the payout ratio to 50% after year 5. Required: i) Estimate the price of an equity share of this company using an appropriate dividend discount model and advise your client whether they should buy a share of the company. ii) Your client is keen to know whether there are any positive growth opportunities from their investment. Explain to your client the meaning of this concept using appropriate calculations. Note: Use two decimal places in your calculations
You are an investment adviser. One of your clients approaches you for your advice on investing inequity shares of Theta Company. You have collected the following data:Earnings per share last year $6.00Payout ratio 0.40Return on equity 0.30Cost of equity capital 0.20The company plans to increase the payout ratio to 60% from year 5.Required:i) Estimate the price of an equity share of this company using an appropriate dividenddiscount model and advise your client whether they should buy a share of the company.ii) Your client is keen to know whether there are any growth opportunities from theirinvestment. Explain to your client the meaning of this concept using appropriatecalculations.iii) If there are positive or negative growth opportunities, explain the reason for suchopportunities.
You are an investment adviser. One of your clients approaches you for your advice on investing in equity shares of Alpha Company. You have collected the following data: Earnings per share last year $6.00 Payout ratio 0.40 Return on equity 0.30 Cost of equity capital 0.20 The company plans to increase the payout ratio to 60% from year 5. Required: i) Estimate the price of an equity share of this company using an appropriate dividend discount model and advise your client whether they should buy a share of the company. ii) Your client is keen to know whether there are any positive growth opportunities from their investment. Explain to your client the meaning of this concept using appropriate calculations. Notes: You need to show detailed calculations in order to receive full marks for this question iii)If there are positive or negative growth opportunities, explain the reason for such opportunities.
The common stock of Placo Enterprises had a market price of $ 9.11 on the day you purchased it just one year ago. During the past year the stock had paid a dividend of $ 1.16 and closed at a price of $ 10.42. What rate of return did you earn on your investment in Placo's stock? Question content area bottom Part 1 The rate of return you earned on your investment in Placo's stock is enter your response here %. (Round to two decimal places.)
Imagine yourself as a financial manager in a company, and you are requested to provide a financial report including the calculation of the current market rate of return from the investor's perspective for each of the four investment options, taking into consideration the followings: Common stocks available for investment are: 2,500,000 shares of common stock, with a par balance of $1 per share. The current market value of the common share is $24.43 per share. Annual earnings per share $1.95. Bonds available for investment $1,750,000 bonds (A) with an interest of 6.25%, with a current market value of $104 per bond (price of $104 per $100). $2,250,000 Notes B, with an interest rate of 5.75%, with a current market value of $94.50 (price $94.50 per $100 note). The corporate tax rate is 35%. Preferred shares available for investment 950,000 outstanding preferred shares with a par value of $10 with a preferential dividend payment…
Calculate stock and bond valuations for PepsiCo. Specifically, the following critical elements must be addressed: Stock Valuation Based on the figures provided from the financial information you prepared for your selected company, calculate each of the following in Part I of the spreadsheet tab: Stock and Bond Valuation: Fill in the yellow highlighted cells with the matching data prepared for your selected company. Identify the new dividend yields if the company increased its dividend per share by $1.75. Identify the dividend yield if the firm doubled its outstanding shares using a stock split. Note that other numbers will be affected by a stock split such as new stock price, actual dividends paid, and number of outstanding shares. Stockholders' equity will not change. Calculate the rate of return on investment based on the data you calculated in Question 1. What effect would each of the calculations you performed have on shareholder value? In other words, suppose the company's…
You have recently been appointed as the investment analyst of Investalot (Pty) Ltd.You are given a table with a list of companies, their stocks and their possible payoffsfor every rand invested as follows:Stock Year 1 (R) Year 2 (R) Year 3 (R)Discovery Ltd 0.8 0.2 0.1Foschini Group Ltd 0.7 0.75 0.55Famous Brands Ltd 0.4 0.15 0.75Required:Using the Minimax regret method choose the stock that will minimise yourmaximum regret.
Assume that you are given the following dividends for your company's common stock for Years 1-5. Also assume that after Year 5, dividends will then grow at a constant growth rate of 4.0 percent. Now assume that the investors require a rate of return of 17.0 percent. Given this information. determine the current price for a share of your company's stock. Year 1 2 3 4 5 O $29.75 O $30.58 $25.46 O $27.44 O $23.72 Dividend $2.40 $3.20 $3.90 $4.50 $5.00
(Calculating rates of return) The common stock of Placo Enterprises had a market price of $9.96 on the day you purchased it just one year ago. During the past year the stock had paid a dividend of $0.85 and closed at a price of $11.55. What rate of return did you earn on your investment in Placo's stock? Question content area bottom Part 1 The rate of return you earned on your investment in Placo's stock is enter your response here%. (Round to two decimal places.)
PLEASE START FROM SECTION C INSTRUCTIONS: Answer the following questions, using spreadsheet financial functions to do the calculations. Use the following information about SV Inc. to calculate the company’s Cost of Capital. The stock of SV Inc. sells for $50, and last year’s dividend was $2.10. A flotation cost of 10% would be required to issue new common stock. SVs’ preferred stock pays a dividend of $3.30 per share, and new preferred could be sold at a price to net the company $30 per share. Security analysts are projecting that the common dividend will grow at a rate of 7% a year. The firm can issue additional long-term debt at an interest rate (or a before-tax cost) of 10%, and its marginal tax rate is 35%. The market risk premium is 6%, the risk-free rate is 6.5%, and Supreme Ventures’ beta is 0.83. In its cost-of-capital calculations, SV Inc. uses a target capital structure with 45% debt, 5% preferred stock, and 50% common equity. REQUIRED: SECTION A Calculate the…
Summarize and discuss the implications of the findings for the business or potential business transaction. ------- Kassidy's Kabob House has preferred stock outstanding that pays a dividend of $5 at the end of each year. The preferred sells for $50 a share. What is the stock's required rate of return? Assume the market is in equilibrium with the required return equal to the expected return. The stock's require rate of return is 10%.
Suppose you purchase one share of the stock of Volatile Engineering Corporation at the beginning of year 1 for $36. At the end of year 1, you receive a $2 dividend and buy one more share for $30. At the end of year 2, you receive total dividends of $4 (i.e., $2 for each share) and sell the shares for $36.45 each. The dollar- weighted return on your investment is Answers: А. -1.75%. B. 8.00%. C. 4.08%. D. 8.53%. Е. 12.35%.