\"Hamlin Steel Comoany wishes to determine the value of Craft Foundry, a firm th
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Question
"Hamlin Steel Comoany wishes to determine the value of Craft Foundry, a firm that it is considering 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 5%. The risk-free rate is currently 6%. Crafts dividend per share for each of the past 6 years is shown in the following table (the picture I posted.)
A. Given that Craft is expected to pay a dividend of $2.73 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 Crafy from: (1) A decrease in its dividend growth rate of 2% from that exhibited over the 2010-2015 period. (2) A decrease in its risk premium to 4%."
For part A please round to the nearest whole percentage. I'm sure you round on part B as well. Ass Exercise Score: 0 of 1 pt Integrative-Risk and Valuation Hamlin Steel Company wishes to determine the value of Craft Foundry constant-growth valuation model Craft's stock is not publicly traded. After stuadying the required returns of f risk-fiee rate is currently 6%Craft's dvidend per share for each of the past 6 years is shown in the following a. Given that Craft is expected to pay a dividend of $2.73 next year, determine the maximum cash price that b. Describe the effect on the resulting value of Craft from (1) A decrease in its dividend growth rate of 2% fom that exhibited over the 2010-2015 period. (2) A decrease in its risk premium to 4%. a. The required return on Craft's stock s Ma (Round to the nearest whole percentage.) Data Table (Click on the icon located on the top-right corner of the data table below in order to copy its contents into a spreadsheet.) Year Dividend per Share 2015 2014 2013 2012 2011 2010 $2.55 $2.38 $2.23 $2.08 $1.95 $1.82 Print Done Enter your answer in the answer box, then click Check Answer 5 parts remaining
Explanation / Answer
From the given table of dividend payments and next year's dividend, we can find that the dividend payment growth is 7.1%
Since next year dividend is $2.73, using gordon growth model, stock price can be calculated as 2.73 / 7.1%
Stock price = 38.68
Since premium paid is given as 5%, Hamlin steel should pay 38.68 ( 1+5%) = $40.61 per share
b) If dividend growth rate is reduced by 2%, i.e. 7.1 - 2.0 = 5.1%, Stock price = 2.73 / 5.1% = 53.97
And premium is reduced to 4%, so Hamlin steel should pay 53.97 * (1+4%) = $56.12 per share
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