Integrative-Risk and Valuation Hamlin Steel Company wishes to determine the valu
ID: 2744293 • Letter: I
Question
Integrative-Risk and Valuation Hamlin Steel Company 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 5%. Craft's dividend per share for each of the past 6 years is shown in the following table: Given that Craft is expected to pay a dividend of $3.17 next year, determine the maximum cash price that Hamlin should pay for each share of Craft. Describe the effect on the resulting value of Craft from: A decrease in its dividend growth rate of 2% from that exhibited over the 2010-2015 period. A decrease in its risk premium to 4%. The required return on Craft's stock is %. (Round to the nearest whole percentage.) The maximum cash price that Hamlin should pay for each share of Craft is $. (Round to the nearest cent.) If the dividend growth rate decreases by 2%, the maximum cash price that Hamlin should pay for each share of Craft is $. (Round to the nearest cent.) If the risk premium decreases to 4%, the required return on Craft's stock is %. (Round to the nearest whole percentage.) With a 9% required return, the maximum cash price that Hamlin should pay for each share of Craft is $. (Round to the nearest cent.) price is a function of the current dividend, , and the risk-free rate, and the company-specific. For craft, the lowering of the dividend growth rate future cash flows resulting in in share price. The decrease in the risk premium reflected in risk leading to in share price. (selected the best answers from the drop-down menus.) (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 $3.02 2014 $2.88 2013 $2.74 2012 $2.61 2011 $2.48 2010 $2.37 Integrative-Risk and Valuation Hamlin Steel Company 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 5%. Craft's dividend per share for each of the past 6 years is shown in the following table: Given that Craft is expected to pay a dividend of $3.17 next year, determine the maximum cash price that Hamlin should pay for each share of Craft. Describe the effect on the resulting value of Craft from: A decrease in its dividend growth rate of 2% from that exhibited over the 2010-2015 period. A decrease in its risk premium to 4%. The required return on Craft's stock is %. (Round to the nearest whole percentage.) The maximum cash price that Hamlin should pay for each share of Craft is $. (Round to the nearest cent.) If the dividend growth rate decreases by 2%, the maximum cash price that Hamlin should pay for each share of Craft is $. (Round to the nearest cent.) If the risk premium decreases to 4%, the required return on Craft's stock is %. (Round to the nearest whole percentage.) With a 9% required return, the maximum cash price that Hamlin should pay for each share of Craft is $. (Round to the nearest cent.) price is a function of the current dividend, , and the risk-free rate, and the company-specific. For craft, the lowering of the dividend growth rate future cash flows resulting in in share price. The decrease in the risk premium reflected in risk leading to in share price. (selected the best answers from the drop-down menus.)Explanation / Answer
Calculation of Required rate of return :
= Risk free rate + Risk premium
= 5% + 5%
= 10%
Calculation of Maximum Share Price :
Given that Craft is expected to pay $3.17 dividend next year and it's dividend Growth rate was 5% by comparing the previous years trend.
maximum cash price = Expected dividend(D1) / Required rate of return - Growth rate
= 3.17 / (0.10 - 0.05)
= $63.40
Calculation of maximum cash price if the growth rate decreased by 2% :
If the growth rate decreased by 2% then growth rate becomes 3% (5% - 2%). And expected divdend will become $3.11 (3.02 * 103%)
Maximum cash price = Expected dividend(D1) / Required rate of return - Growth rate
= 3.11 / (0.10 - 0.03)
= $44.43
If the risk premium decreases to 4%, then the required rate of return will be
= 5%(risk free rate) + 4 % (risk premium)
= 9%
Calculation of maximum cash price at required rate of return of 9% :
Maximum cash price = Expected dividend(D1) / Required rate of return - Growth rate
= 3.17 / (0.09 - 0.05)
= $79.25
Price is a function of the current dividend , Risk premium and the risk free rate, and the company's Specific growth rate . For craft the lowering of the dividend growth rate implies future cashflows resulting in Decrease in share price.The decrease in risk premium reflected in risk leading to Increase in share price.
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