Integrative-Risk and Valuation. Hamlin Steel Company Wishes to determine the val
ID: 2734483 • Letter: I
Question
Integrative-Risk and Valuation. Hamlin Steel Company Wishes to determine the value of Craft Foundry, a firm that is considering acquiring for cash. Hamlin wishes to determine the applicable discount rate to use as an input to the constant-growth valuation model. Crafts 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 4%. The risk free rate is currently 6%. Crafts dividend per share for each of the past 6 years is showin in the following table..... ......A) Given that craft is expected to pay a dividend of 3.73$ next year, determine the maximum cash price that Hamlin should pay for each share of Craft.
Explanation / Answer
Rate of growth in dividends:
$ 3.32
Average growth rate in dividends = 20.04% / 5 = 4%
If Craft is expected to pay a dividend of $ 3.73 next year (D1), then the price of the stock = D1/ ( r - g) = 3.73 / ( 0.10 - 0.04) = $ 62.17
b. 1. If dividend growth rate decreases by 2%, revised stock price = 3.73 / ( 0.10 - 0.02) = $ 46.63
2. If risk premium decreases to 3%, revised stock price = 3.73 / ( 0.09 - 0.04) = $ 74.60
Year Dividend per share Growth in dividends 2010 $ 2.95 - 2011 $ 3.07 4.07% 2012 $ 3.19 3.91% 2013$ 3.32
4.08% 2014 $ 3.45 3.92% 2015 $ 3.59 4.06% 20.04%Related Questions
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