C) Assume that Bon Temps has a beta coefficient of 1.2, that the risk free rate
ID: 2688698 • Letter: C
Question
C) Assume that Bon Temps has a beta coefficient of 1.2, that the risk free rate is 7% and the required rate of return on the market is 12%. What is Bons required rate of return? D) Assume Bon is a constant growth co whose last dividend was $2. and dividend is expected to grow indefinitely at 6%rate 1. what is the firms expected dividend stream over the next 3 years? 2. What is its current stock price? 3.What is the stocks expected value 1 yr from now? 4. What are the expected dividend yield, capital gains yield, and total return during the 1st yr? E) Now assume that the stock is currently selling at $30.29, what is its expected rate of return? F) What would the stock price be if its dividends were expected to have zero growth? G) Now assume that Bon is expected to experience nonconstant growth of 30% for the next 3 yrs then return to its long-run constant growth rate of 6%. What is the stocks value under these conditions? What are its expected dividend and capital gains in year 1 and year 4? H) Suppose Bon is expected to experience zero growth during the first 3 yrs and then resume its steadystate growth of 6% in the 4th yr. What would be its value then? What would be its expected dividend and capital gain yields in yr 1 and yr 4?Explanation / Answer
ASSUME THAT BON TEMPS HAS A BETA COEFFICIENT OF 1.2, THAT THE RISK-FREE RATE (THE YIELD ON T-BONDS) IS 7 PERCENT, AND THAT THE REQUIRED RATE OF RETURN ON THE MARKET IS 12 PERCENT. WHAT IS THE REQUIRED RATE OF RETURN ON THE FIRM’S STOCK?
ANSWER: [SHOW S8-10 HERE.] HERE WE USE THE SML TO CALCULATE BON TEMPS REQUIRED RATE OF RETURN:
ks = kRF + (kM – kRF)bBon Temps = 7% + (12% - 7%)(1.2)
= 7% + (5%)(1.2) = 7% + 6% = 13%.
ASSUME THAT BON TEMPS IS A CONSTANT GROWTH COMPANY WHOSE LAST DIVIDEND (D0, WHICH WAS PAID YESTERDAY) WAS $2.00 AND WHOSE DIVIDEND IS EXPECTED TO GROW INDEFINITELY AT A 6 PERCENT RATE.
1. WHAT IS THE FIRM’S EXPECTED DIVIDEND STREAM OVER THE NEXT 3 YEARS?
ANSWER: [SHOW S8-11 HERE.] BON TEMPS IS A CONSTANT GROWTH STOCK, AND ITS DIVIDEND IS EXPECTED TO GROW AT A CONSTANT RATE OF 6 PERCENT PER YEAR. EXPRESSED AS A TIME LINE, WE HAVE THE FOLLOWING SETUP. JUST ENTER 2 IN YOUR CALCULATOR; THEN KEEP MULTIPLYING BY 1 + g = 1.06 TO GET D1, D2, AND D3:
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