Discuss the use of the capm for estimating the value of comm

Assignment Help Finance Basics
Reference no: EM131131800

Hamlin Steel Company wishes to determine the value of Craft Foundry, a firm that it is considering acquiring for cash. Hamlin wishes to use the capital asset pricing model (CAPM) to determine the applicable discount rate to use as an input to the constant-growth valuation model. Craft's stock is not publicly traded. After studying the betas of firms similar to Craft that are publicly traded, Hamlin believes that an appropriate beta for Craft's stock would be 1.25. The risk-free rate is currently 9%, and the market return is 13%. Craft's dividend per share for each of the past 6 years is shown in the following table.

768_b.jpg

a. Given that Craft is expected to pay a dividend of $3.68 next year, determine the maximum cash price that Hamlin should pay for each share of Craft.

b. Discuss the use of the CAPM for estimating the value of common stock, and describe the effect on the resulting value of Craft of:

(1) A decrease in its dividend growth rate of 2% from that exhibited over the 2004-2009 period.

(2) A decrease in its beta to1.

Reference no: EM131131800

Questions Cloud

What is a case reason and conclusion : The nephew did so and asked his uncle for the money. His uncle agreed to pay, but the uncle suddenly died in a car crash. The uncle's estate representatives refused to pay the nephew and argued that there was no consideration for uncle's promise..
What is the sign of the correlation : What is the sign of the correlation between yt and yt-1? How about the sign of the correlation between yt and yt-2?  between yt and yt-3? Do you see a pattern
Journalize the admission of day to the partnership : The partners share income equally. Day is admitted to the firm by purchasing one-half of Cox's interest for $13,000.
Write a report on a specific culture : Write a report on a specific culture (Macedonia).- Describe general history of the country (political, geographical, cultural...etc.).
Discuss the use of the capm for estimating the value of comm : Given that Craft is expected to pay a dividend of $3.68 next year, determine the maximum cash price that Hamlin should pay for each share of Craft. Discuss the use of the CAPM for estimating the value of common stock, and describe the effect on the r..
High growth rate of the young hispanic population : Given the high growth rate of the young Hispanic population, and the decline in traditional college-age non-Hispanic white population, how would you develop a marketing plan for a university or college to improve its recruitment of Hispanic students?
About the No Smoking Policy : Choose a business policy (e.g., No Smoking Policy) to analyze preferably a policy where you work or have worked in the past. 1. Analyze and evaluate the policy.
Decrease in beta would have on the value of giant stock : Use the capital asset pricing model (CAPM) to determine the required return on Giant's stock. Using the constant-growth model and your finding in part a, estimate the value of Giant's stock. Explain what effect, if any, a decrease in beta would have ..
National cultures important in strategic managment : How can a corporate culture be changed? Why is an understanding of nation cultures important in strategic management? Why is understanding of national cultures important in strategic managment?

Reviews

Write a Review

Finance Basics Questions & Answers

  Financial management for ordinary business

We have discussed many times the distinctions between financial management for ordinary business and financial management for health care-based businesses.

  Where do ethical preferences originate

Question 1: Where do ethical preferences originate? Question 2: Kant's deontological theory posits that moral behavior requires holding to certain principles without exception, he outlines this principle by means of developing:

  Financing and investment decisions

Because of differing market imperfections, financing decisions (related to the right side of balance sheet) are less easily reversed than investment decisions (related to left side of balance sheet). Check whether true or false.

  What is the standard deviation of these expected returns

The probability of a normal economy is 74 percent while the probability of a recession is 15 percent and the probability of a boom is 11 percent. What is the standard deviation of these expected returns?

  Estimate of the after-tax cost of debt

The noncallable $1,000 par value, 20-year, 7.25% bonds with semiannual payments are selling for $875. The firm's tax rate is 40%.

  Should a company reject any investment opportunity

should a company reject any investment opportunity that falss below the market line?

  Interest expense and net income

Last year a company had $365,000 of assets, $28,275 of net income, and a debt-to-total-assets ratio of 42%. However, the president is convinced to increase the debt ratio to 54%. Sales and total assets will not be affected, but interest expenses w..

  Write a piece of research on the impact quantitative

Write a piece of research on the impact quantitative easing had, in your view, on the fixed income markets. What are the consequences of this program coming to an end? Feel free to be verbose and remember, this is a graduate course.

  Compute the net present value of the two projects

Project A could be modified. By spending $25,000 more initially, the net annual cash flows could be increased by $10,000 per year. Would this change Leung'sdecision?

  How much they have to save each year to reach their goal

If they think you will take five years instead of four to graduate to graduate and decide to have $140,000 saved just in case, how much more would they have to save each year to reach their new goal?

  Determine the price of the io and po security

Determine the price of the IO and PO security, assuming that there is no prepayment. Further assume that the IO investors require a market rate of return of 4.5% and the PO investors require a market return of 6%.

  What bid price per carton should you submit

If your tax rate is 35 percent and you require a 14 percent return on your investment, what bid price per carton should you submit?

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd