1. Microtech Corporation is expanding rapidly and currently needs to retain all
ID: 2617822 • Letter: 1
Question
1. Microtech Corporation is expanding rapidly and currently needs to retain all of its earnings; hence, it does not pay dividends. However, investors expect Microtech to begin paying dividends, beginning with a dividend of $0.50 coming 3 years from today.The dividend should grow rapidly - at a rate of 50% per year - during Years 4 and 5; but after Year 5, growth should be a constant 6% per year. If the required return on Microtech is 16%, what is the value of the stock today? Round your answer to the nearest cent.
$ ________
2. Barrett Industries invests a large sum of money in R&D; as a result, it retains and reinvests all of its earnings. In other words, Barrett does not pay any dividends, and it has no plans to pay dividends in the near future. A major pension fund is interested in purchasing Barrett's stock. The pension fund manager has estimated Barrett's free cash flows for the next 4 years as follows: $2 million, $7 million, $10 million, and $15 million. After the fourth year, free cash flow is projected to grow at a constant 4%. Barrett's WACC is 15%, the market value of its debt and preferred stock totals $64 million, and it has 17 million shares of common stock outstanding.
a. What is the present value of the free cash flows projected during the next 4 years? Round your answer to the nearest cent.
$ ____________
b. What is the firm's horizon, or continuing, value? Round your answer to the nearest cent.
$ ____________
c. What is the firm's total value today? Round your answer to the nearest cent.
$ ____________
d. What is an estimate of Barrett's price per share? Round your answer to the nearest cent.
$ ____________
Explanation / Answer
1.
If the required return on Microtech is 16%, what is the value of the stock today
=0.50/(1+16%)^3+(0.50*(1+50%)^1)/(1+16%)^4+(0.50*(1+50%)^2)/(1+16%)^5+((0.50*(1+50%)^2*(1+6%))/(16%-6%))/(1+16%)^5
=6.95
THE ABOVE IS ANSWER..
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