Question

Assessing the Impact of Suarez​ Manufacturing's Proposed Risky Investment on Its Stock Value   Early in​ 2013, Inez​ Marcus, the chief financial officer for Suarez​ Manufacturing, was given the task of assessing the impact of a proposed risky investment on the​ firm's stock value. To perform the necessary​ analysis, Inez gathered the following information on the​ firm's stock. During the immediate past 5 years​ (2008-2012), the annual dividends paid on the​ firm's common stock were as​ follows: Dividend per share 2012 $ 1.90 2011 1.70 2010 1.55 2009 1.40 2008 1.30

a. Find the current value per share of Suarez​ Manufacturing's common stock. The firm expects that without the proposed​ investment, the dividend in 2013 will be

$ 2.09

per share and the historical annual rate of growth​ (rounded to the nearest whole​ percent) will continue in the future.​ Currently, the required return on the common stock is

14.0 %

.

​Inez's research indicates that if the proposed investment is​ undertaken, the 2013 dividend will rise to

$ 2.15

per share and the annual rate of dividend growth will increase to

13.0 %

.

She feels that in the best​ case, the dividend would continue to grow at this rate each year into the future and that in the worst​ case, the

13.0 %

annual rate of growth in dividends would continue only through​ 2015, and​ then, at the beginning of​ 2016, would return to the rate that was experienced between 2008 and 2012. As a result of the increased risk associated with the proposed risky​ investment, the required return on the common stock is expected to increase by

2.0 %

to an annual rate of

16.0 %

​,

regardless of which dividend growth outcome occurs.

Armed with the preceding​ information, Inez must now assess the impact of the proposed risky investment on the market value of​ Suarez's stock.

To Do

a. Find the current value per share of Suarez​ Manufacturing's common stock.

b. Find the value of​ Suarez's common stock in the event that it undertakes the proposed risky investment and assuming that the dividend growth rate stays at

13.0 %

forever. Compare this value to that found in part

​(a​).

What effect would the proposed investment have on the​ firm's stockholders? Explain.c. On the basis of your findings in part

​(b​),

do the stockholders win or lose as a result of undertaking the proposed risky​ investment? Should the firm do​ it? Why?d. Rework parts

​(a​)

and

​(b​)

assuming that at the beginning of 2016 the annual dividend growth rate returns to the rate experienced between 2008 and 2012.

Answer 1

Soluction = Dividend growth rate - (Divin 2012) Div in 2008)^(1/)-1 = (1.90 11.30)^(114)-2 = 1.0995-1 = 9.95% *please rate *