hares of common ska Goldencat Property Management, a London-based corporation, h

Question

hares of common ska Goldencat Property Management, a London-based corporation, has 1 million Up until year , e company's net earning E (cash flow) reached 2 million in company's stock price at time 0 is -10 pound per share. The om,pany's " stock public market with a beta of 1.5. The dividend per share in period O is D1 Assume and stock prices are consistent with constant dividend growth rate model . (a). Assume the expected return on the market portfolio is E(Fm)-11% and the risk free rate is ry = 3%. what is investors' required rate of return on Goldencat's amnion-gek? (5 poists) 1.S (b). Jeffery, the CEO of Goldencat, announces at the end of period O, that company is expected to see 7.5% for the foreseeable future, and munmits to a dividend payout ratio a net earning growth of q of . That is 85% Et If the stock market believes in Jeffery's promise, what will the stock price be? what is the rate of return on holding Goldencat's common stock from between 0 to period 1? (5 points) . (c). Shortly after his announcement, rumors spread such that Jeflery might have exaggerate the company's earning growth potential, where the true earning growth rate might only be 2.5%. Thern are also indications that he might sell some of the company shares be owned in period 1. If the rumors were true, what will the stock price Pt be? . (d). The financial market assigned .-70% probability that Jeffery lid, ard ",-30% ptul alul ity either be / ur that he did not. The uncertainty will be resolved in period 1, and the stock pricewil thr a Pt. What is the period 0 expected return and standard deviation of returns on holding Gollencat common stock between period 0 and period 1? . (e). In the midst of rumors, the board of directors of Goldencat receives a hostile takooner tul f DragonCorp who would purchase 510,000 shares at 11 pounds per share. If the board approves the Hint: in general, stock return from period t to period t +1 is defineda

Explanation / Answer

Question (e) is incomplete. I am solving part (d) here. Please post the complete part (e) to get it answered.

d)

Using CAPM, the required return on equity, r = 3 + 1.5*(11-3) = 15%

If Jeffrey is telling the truth, then the Earnings in period 1 will be:

E1 = 1.075*2 = 2.15 million dollars.

Dividend, D1 = 0.85*E1 = 1.8275 million dollars

As total outstanding shares = 1 million, Dividend Per share = $1.8275

Using dividend growth model,

The Value of per share of Company, V1 at t =1 will be D2/r-g

Here, D1 = 1.8275 so D2 = 1.075*D1 = 1.9645625 , r = 0.15 and g = 0.075

Thus, V1 = 1.9645625/(0.15-0.075) = $26.1941

There is a 30% probability of getting this value at t =1

If Jeffrey is lying,

E1 = 1.025*2 = 2.05 million dollars

Dividend, D1 = 0.85*E1 = 1.7425 million dollars = $1.7425 per share

D2 = 1.025*D1 = $1.78606

V2 = D2/(r-g) = 1.78606/(0.15-0.025) = $14.2885

There is a 70% probability of getting this value at t = 1.

Case 1: Jeffrey is telling the truth,

Expected return , E1 = (26.1941+1.8275 )/10 - 1 = 1.8021 = 180.21%

Case 2: Jeffrey is lying,

Expected return, E2 = (14.2885+1.7425)/10 – 1 = 60.31%

Expected return for period 1 at t = 0 is

0.3*180.21 + 0.7*60.31 = 96.28%

We’ll use the standard deviation formula as the square root of variance to calculate the S.D. Below table captures the calculations:

Variance = Sum of Squared Deviations /2 = 4169.0429

Standard Deviation = Square root of variance = 64.5681%

E1 E2 Mean 180.21 60.31 96.28 Deviation from Mean -83.93 35.97 Squared Deviation 7044.2449 1293.8409

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