1. Nick\'s Enchiladas Incorporated has preferred stock outstanding that pays a d

ID: 2625903 • Letter: 1

Question

1. Nick's Enchiladas Incorporated has preferred stock outstanding that pays a dividend of $5 at the end of each year. The preferred sells for $55 a share. What is the stock's required rate of return (assume the market is in equilibrium with the required return equal to the expected return)? Round the answer to two decimal places.

2. A company currently pays a dividend of $4 per share (D0 = $4). It is estimated that the company's dividend will grow at a rate of 19% per year for the next 2 years, then at a constant rate of 7% thereafter. The company's stock has a beta of 1.8, the risk-free rate is 3.5%, and the market risk premium is 6%. What is your estimate of the stock's current price? Round your answer to the nearest cent.

3.EMC Corporation has never paid a dividend. Its current free cash flow of $500,000 is expected to grow at a constant rate of 5.1%. The weighted average cost of capital is WACC = 12.75%. Calculate EMC's estimated value of operations. Round your answer to the nearest dollar.

Current and projected free cash flows for Radell Global Operations are shown below.

Growth is expected to be constant after 2015, and the weighted average cost of capital is 10.95%. What is the horizon (continuing) value at 2016 if growth from 2015 remains constant? Round your answer to the nearest dollar. Round intermediate calculations to two decimal places.

Actual
2013
2014 Projected
2015
2016 Free cash flow $615.44 $676.12 $716.17 $759.14 (millions of dollars)

Explanation / Answer

1. stock's required rate of return = D/P = 5/55= 9.09%

R= 3.5%+ 1.8*6%= 14.30%

stock's current price = 4*1.19/(1+14.30%) + 4*1.19^2/(1+14.30%)^2 + (4*1.19^3/(14.30%-7%))/(1+14.30%)^2=$79.18

EMC's estimated value of operations = 500000*(1+5.1%)/(12.75%-5.1%)=$6,869,281

Current and projected free cash flows for Radell Global Operations are shown below.

Actual
2013

2014

Projected
2015

2016

Free cash flow

$615.44

$676.12

$716.17

$759.14

(millions of dollars)

G = (759.14-716.17)/ 716.17 = 6%

horizon (continuing) value = 759.14/(10.95%-6%)= 15,336.16