Reference no: EM132855834

Problem - Stock Evaluation Robert Su and Carol Tso are senior vice presidents of Ping An Insurance (Group). Company of China Ltd. Su's main responsibility is fixed-income securities (primarily bonds) and Tso being responsible for equity investments. A major new client, Synergis Holdings Ltd, has requested that Ping An Insurance present an investment seminar to their shareholders and directors; and Su and Tso, who will make the actual presentation, have asked you to help them.

To illustrate the common stock valuation process, Su and Tso have asked you to analyze the Bau Bau Company, an employment agency that supplies word processor operators and computer programmers to businesses with temporarily heavy workloads. You are to answer the following questions.

a. Describe briefly the legal rights and privileges of common stockholders.

b. 1. Show a formula that can be used to value any stock, regardless of its dividend pattern.

2. What is a constant growth stock? How are constant growth stocks valued?

3. What are the implications if a company forecasts a constant g which exceeds its rs? Will many stocks have expected g > r in the short run (that is, for the next few years)? In the long run (that is, forever)?

c. Assume that Bau Bau company has a beta coefficient of 1.2, that the risk-free rate (the yield on T-bonds) is 7%, and that the required rate of return on the market is 12%. What is Bau Bau company's required rate of return?

d. Assume that Bau Bau Company is a constant growth company whose last dividend (D, which was paid yesterday) was $2.00, and whose dividend is expected to grow indefinitely at a 6% rate.

1. What is the firm's expected dividend stream over the next 3 years?

2. What is its current stock price?

3. What is the stock's expected value 1 year from now?

4. What are the expected dividend yield, capital gains yield, and the total return during the first year?

e. Now assume that the stock is currently selling at $30.29. What is the expected rate of return?

f. What would the stock price be if its dividends were expected to have zero growth?

g. Now assume that Bau Bau Company is expected to experience non constant growth of 30% for the next 3 years, then return to its long-run constant growth rate of 6%. What is the stock's value under these conditions? What are its expected dividend yield and capital gains yield in year 1? year 4?

h. Suppose Bau Bau Company is expected to experience zero growth during the first 3 year and then resume its steady-state growth of 6% in the fourth year. What would be its value then? What would be its expected dividend and capital gains yields in Year 1? In Year 4?