Question

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Integrative-Risk and Valuation Hamlin Steel Company wishes to determine the value of Craft Foundry, a firm that it is considering acquiring for cash. Hamlin wishes 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 required returns of firms similar to Craft that are publicly traded, Hamlin believes that an appropriate risk premium on Craft stock is about 9%. The risk-free rate is currently 5%. Craft's dividend per share for each of the past 6 years is shown in the following table: a. Given that Craft is expected to pay a dividend of $3.21 next year, determine the maximum cash price that Hamlin should pay for each share of Craft. (Hint: Round the growth rate to the nearest whole percent.) b. Describe the effect on the resulting value of Craft from: (1) A decrease in its dividend growth rate of 2% from that exhibited over the 2014-2019 period. (2) A decrease in its risk premium to 8%. í Data Table . X in order to copy the contents of the data table below (Click on the icon here into a spreadsheet.) Year 2019 2018 2017 2016 2015 2014 Dividend per Share $3.09 $2.97 $2.85 $2.74 $2.64 $2.54 Print Done

Answer 1

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10:01 voraux ENG F 27-03-2020 . 11 X EA219 - X fix DPDQ DO DR DS DV DW DX DY DZ EA EB EC ED A 195 196 197 198 DI DT DU COST OF EQUITY = ke REQUIRED RATE = REQUIRED RATE = RISK FREE RATE + RISK PREMIUM 5% + 9% = 14% a 199 GROWTH RATE 2014 2019 DIVIDEND 2.54 PV 3.09 FV NO OF YEARS = N = 5 4.0% [ROUNDED] (=RATE(5,,-DU202,DU203)] 200 201 202 203 204 205 206 207 208 209 210 211 212 213 214 215 216 217 218 219| PO = PO = D1/(ke - g) 3.21/(0.14-0.04) = 32.10 g= 6%-2% = 4% DECREASE IN GROWTH RATE D1 = DO*(1+g) = 3.09*(1+0.02) = 3.1518 PO = D1/(ke-g) 3.1518/(0.14-0.02) = PO = 26.27 KE CAPM UTILITY, SHARPE, beta coNvexity DGM beta port future INDEX INTL CAP BUD SANDRINE LEASING PORTFOLOQ DIR right clean YIELD bc ... T

10:01 @ voca 1x 2 ENG 27-03-2020511 . X DR219 X fi DPDQ DO DRDS DE DU DV DW DX DY DZ EA EB EC ED A 219 220 221 DECREASE IN RISK PREMIUM TO 8% 222 ke = 5% + 8% = 13% PO = D1/(ke - g) 3.21/(0.13-0.04) = PO = 35.67 223 224 225 226 227 228 229 230 231 232 233 234 235 236 237 238 239 240 241 242 243 KE CAPM UTILITY, SHARPE, beta coNvexity DGM beta port future INDEX INTL CAP BUD SANDRINE LEASING PORTFOLO Q DIR right clean YIELD bc ... Đ