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Chiptech, Inc., is an established computer Chip firm with several profitable existing products as well as some promising new products in development. The company earned
a. What is the market price of Chiptech stock? The required return for the computer chip industry is
b. Suppose you discover that Chiptech’s competitor has developed a new chip that
will eliminate Chiptech’s current technological advantage in this market. This new product, which will be ready to come to the market in two years, will force Chiptech to reduce the prices of its chips to remain competitive. This will decrease ROE to
c. No one else in the market perceives the threat to Chiptech’s market. In fact, you are confident that no one else will become aware of the change in Chiptech’s competitive status until the competitor firm publicly announces its discovery near the end of year
d. What will be the rate of return in the second year (between
e. What will he the rate of return in the third year [between
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Chapter 13 Solutions
Essentials Of Investments
- •Suppose we are trying to value the company Inactivision, a video game developer that does not pay dividends and has negative earnings but it growing. If the appropriate industry price to sales ratio for this type of company is 20 and you predict sales to be $3 per share for the coming year, then the forecasted stock price for a year from now, or target price, is the following: Respuesta:arrow_forwardAntiques R Us is a mature manufacturing firm The company just paid a dividend of $10.65, Management expects to reduce the payout by 5 percent per year indefinitely The required rate of return is 12% on this stock. What will you pay for Antiques R Us today?arrow_forwardMarket Value Added. Suppose the broad stock market falls 20% in a year and Home Depot's stock price falls by 10%. (LO4-1) 2. a. Will the company's market value added rise or fall? b. Should this change affect our assessment of the performance of Home Depot's managers? c. Would you feel differently about Home Depot's managers if the stock market were unchanged and Home Depot's stock fell by 10%?arrow_forward
- Better Mousetraps has come out with an improved product, and the world is beating a path to its door. As a result, the firm projects growth of 20% per year for four years. By then, other firms will have copycat technology, competition will drive down profit margins, and the sustainable growth rate will fall to 5%. The most recent annual dividend was DIV1 = $1 per share. What are the expected values of (i) DIV1 , (ii) DIV2, (iii) DIV3, and (iv) DIV4? What is the expected stock price four years from now? The discount rate is 10%. What is the stock price today? Find the dividend yield, DIV1/P0. What will next year's stock price, P1, be? What is the expected rate of return to an investor who buys the stock now and sells it in one year?arrow_forwardThe Textbook Production Company has been hit hard due to increased competition. The company’s analysts predict that earnings (and dividends) will decline at a rate of 5 percent annually forever. Assume that rs = 11 percent and Do = $1.00. What will be the price of the company’s stock three years from now? a) $27.17 b) $ 5.09 c) $28.50 d) $10.18 e) $20.63arrow_forwardA group of investors is intent on purchasing a publicly traded company and wants to estimate the highest price they can reasonably justify paying. The target company's equity beta is 1.20 and its debt-to-firm value ratio, measured using market values, is 60 percent. The investors plan to improve the target's cash flows and sell it for 12 times free cash flow in year five. Projected free cash flows and selling price are as follows. ($ millions) Year 5 1 $38 Free cash flows 2 3 4 $53 $58 $63 $ 63 $ 756 Selling price Total free cash flows $38 $53 $58 $63 $819 To finance the purchase, the investors have negotiated a $530 million, five-year loan at 8 percent interest to be repaid in five equal payments at the end of each year, plus interest on the declining balance. This will be the only interest-bearing debt outstanding after the acquisition. Selected Additional Information Tax rate 40 percent Risk-free interest rate 3 percent Market risk premium 5 percent a. Estimate the target firm's…arrow_forward
- As an analyst for Kingbird Inc., you are responsible for many firms, including ADFC. Currently you have a "hold" recommendation on ADFC. The current price of ADFC is $154. You have conducted an extensive analysis of the industry and you feel that the probability the firm will capture a substantial share of the new market is 25 percent. If the firm is able to capture the new market, you are expecting earnings to grow at a rate of 45 percent per year for the next five years. In that case, the stock price would rise to $234 due to the unusually high growth rate of future earnings. However, you feel there is a 35-percent probability that the firm will face serious difficulties in the near future, in which case the stock price will fall to $114, and the earnings growth rate will drop to 3 percent. There is a 40-percent chance that nothing will change for the firm and its earnings growth rate will remain at 12 percent. Calculate the expected price in the future. (Round intermediate…arrow_forwardBunkhouse Electronics is a recently incorporated firm that makes electronic entertainment systems. Its earnings and dividends have been growing at a rate of 38.5%, and the current dividend yield is 10.50%. Its beta is 1.37, the market risk premium is 16.50%, and the risk-free rate is 2.30%. a. Use the CAPM to estimate the firm's cost of equity. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Cost of equity % b. Now use the constant growth model to estimate the cost of equity. (Do not round intermediate calculations. Enter your answer as a whole percent.) Cost of equity % c. Which of the two estimates is more reasonable?arrow_forwardTop Secrets stronghold company (agossipcompany) has fallen on hardtimes. Management expects to pay no dividend for the next 2years. However,the dividend for year will be GH¢1 per share and the dividend is expected to grow at a rate of 3% in year 4 , 6% year 5 and 10% in year 6 and therefore. If the required return for this company is 20%, what is the current equilibrium price of the share?arrow_forward
- Maxwell Mining Company's ore reserves are being depleted, so its sales are falling. Also, because its pit is getting deeper each year, its costs are rising. As a result, the company's earnings and dividends are declining at the constant rate of 4% per year. If D0 = $5 and rs = 18%, what is the value of Maxwell Mining's stock? Round your answer to the nearest cent.arrow_forwardRoma Inc. is presently enjoying relatively high growth because of a surge in the demand for its new product. Management expects earnings and dividends to grow at a rate of 22% for the next 4 years, after which competition will probably reduce the growth rate in earnings and dividends to zero, i.e., g = 0. The company’s last dividend, D0, was $1.25, its beta is 1.20, the market risk premium is 5.50%, and the risk-free rate is 3.00%. What is the current price of the common stock?arrow_forwardA group of investors is intent on purchasing a publicly traded company and wants to estimate the highest price they can reasonably justify paying. The target company’s equity beta is 1.20 and its debt-to-firm value ratio, measured using market values, is 60 percent. The investors plan to improve the target’s cash flows and sell it for 12 times free cash flow in year five. Projected free cash flows and selling price are as follows. ($ millions) Year 1 2 3 4 5 Free cash flows $38 $53 $58 $63 $ 63 Selling price $ 756 Total free cash flows $38 $53 $58 $63 $ 819 To finance the purchase, the investors have negotiated a $530 million, five-year loan at 8 percent interest to be repaid in five equal payments at the end of each year, plus interest on the declining balance. This will be the only interest-bearing debt outstanding after the acquisition. Selected Additional Information Tax rate 40 percent Risk-free interest rate 3 percent Market risk…arrow_forward
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