Question

Integrative Risk and Valuation Hamlin Steel Company wishes to determine the value of Craft Foundry, a firm that it is considenng 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 7%. The risk-free rate is currently 4% 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 $3.79 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 6% a. The required return on Craft's stock is % (Round to the nearest whole percentage.)

Answer 1

­SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

E W ' vo a 1x 2 ENG , 07:15 26-03-2020 ... o X - X DW404 _ DO 380 381 for D Q DP DR D S DE DU DV _ DW DX DY DZ EA EB Formulare ED A 382 HAMLIN STEEL 383 384 385 386 387 388 389 390 COST OF EQUITY = ke REQUIRED RATE = REQUIRED RATE = RISK FREE RATE + RISK PREMIUM 4% + 7% = 11% 391 GROWTH RATE 2014 2019 DIVIDEND 2.83 PV 3.61 FV NO OF YEARS = N = 5 392 393 394 395 396 397 398 399 400 401 402 403 404 5.0% [ROUNDED] (=RATE(5,,-DU394,DU395)] PO = PO = D1/(ke - g) 3.79/(0.11-0.05) = 63.17 KE CAPM UTILITY, SHARPE, beta coNvexity DGM beta port future INDEX INTL CAP BUD SANDRINE LEASING PORTFOLO Q DIR right clean YIELD bc ... +

= W - ENG @VO G. 1x 2 07:16 26-03-2020 X : * fix DPDQ DR DS DI DUDVDW DX DYDZ EA EBEC ED A b (0) g= 5%-2% = 3% DECREASE IN GROWTH RATE DW426 DO 403 404 405 406 407 408 409 410 411 412 D1 = DO*(1+g) = 3.61*(1+0.03) = 3.7183 PO = PO = D1/(ke-g) 3.7183/(0.11-0.03) = 46.48 DECREASE IN RISK PREMIUM TO 6% 413 ke = 4% + 6% = 10% 414 415 416 PO = D1/(ke - g) 3.79/(0.10-0.05) = 417 PO = 75.80 418 419 420 421 422 423 424 425 426 KE CAPM UTILITY, SHARPE, beta coNvexity DGM beta port future INDEX INTL CAP BUD SANDRINE LEASING PORTFOLOQ DIR right clean YIELD bc ... + :