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Assume you’ve generated the following information about the stock of Bufford’s Burger Barns: The company’s latest dividends of $4 a share are expected to grow to $4.32 next year, to $4.67 the year after that, and to $5.04 in three years. After that, you think dividends will grow at a constant 6% rate. a. Use the variable growth version of the dividend valuation model and a required return of 15% to find the value of the stock. b. Suppose you plan to hold the stock for three years, selling it immediately after receiving the $5.04 dividend. What is the stock’s expected selling price at that time? As in part (a), assume a required return of 15%. c. Imagine that you buy the stock today paying a price equal to the value that you calculated earlier in part a. You hold the stock for three years, receiving the dividends as described above. Immediately after receiving the third dividend, you sell the stock at the price calculated in part b. Use the IRR approach to calculate the expected return on the stock over three years. Could you have guessed what the answer would be before doing the calculation? d. Suppose the stocks current market price is actually $44.65. Based on your analysis from part a, is the stock overvalued or undervalued? e. A friend of yours agrees with your projections of Buffords future dividends, but he believes in three years, just after the company pays the $5.04 dividend, the stock will be selling in the market for $53.42. Given that belief, along with the stocks current market price from part d, calculate the return that your friend expects to earn on this stock over the next three years.
Maxim Inc. reported a per-share book value of $10.47 in its balance sheet on December 31, 2014. In early 2015, analysts were forecasting consensus earnings per share of $1.71 for 2015 and 1.96 for 2016. Calculate the per share value in early 2015 ass..
What is the Cash Conversion Cycle (CCC)? Name the components of the CCC and explain why the CCC is important to business. Name and describe the three functions of managerial finance. For each, give an example other than those used in the text and lec..
Explain how your business would likely be affected if the central bank of Mexico used indirect intervention by lowering Mexican interest rates (assume inflationary expectations have not changed).
An insured municipal bond bears a lower cost to the borrower than does an equivalent uninsured bond because:
Determine the beta of one security by regressing the returns for the share on the returns for the FT ALL Share Index and determine the co-variances for each pair of securities in the portfolio
Determine the size of your estate by reviewing your personal balance sheet and filling out the table below.
If Joe Dirt's Worms has annual sales of $475,000, cost of goods sold of $410,000, average inventories of $49,000, average accounts receivable of $56,000, and an average accounts payable balance of $39,800. Assuming that all of worms’ sales are on cre..
For what reasons would a firm use a financial model in projecting future cash flows from an investment, and what are the primary factors to consider when making the cash flow estimates?
Premium Pie Company needs to purchase a new baking oven to replace an older oven that requires too much energy to run. The industrial size oven will cost $1,200,000. The oven will be depreciated on a straight-line basis over its six-year useful life...
A firm evaluates all of its projects by applying the NPV decision rule. A project under consideration has the following cash flows: Year Cash Flow 0 –$ 27,400 1 11,400 2 14,400 3 10,400. What is the NPV for the project if the required return is 12 pe..
Include percentages in the Income Statement (vertical analysis) i.e., gross profit percentage, % of selling expenses to sales, etc. (common sizing and vertical analysis are basically the same analysis techniques - every number in the multi-step in..
The current market price of a security is $40, the security's expected return is 13%, the riskless rate of interest is 7%, and the market risk premium is 8%. a. What will be the security's price, if the covariance of its rate of return with the marke..
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