CORPORATE FINANCE - Minicase Essay Example | Topics and Well Written Essays - 1500 words

CORPORATE FINANCE - Minicase - Essay Example D0 = 2.00 2.12 2.247 2.382 1.88 1.76 1.65 . . . (2) What is the firm's current stock price (Ehrhardt & Brigham, 2006) = = = = $30.29. (3) What is the stock's expected value 1 year from now (Ehrhardt & Brigham, 2006) = = = = $32.10. (4) What are the expected dividend yield, the capital gains yield, and the total return during the first year (Ehrhardt & Brigham, 2006) Total return = 13.0% Dividend yield = $2.12/$30.29 = 7.0% Capital gains yield = 6.0% The dividend yield in the first year is 10 percent, while the capital gains yield is 6 percent. e. Now assume that the stock is currently selling at $30.29. What is the expected rate of return on the stock (Ehrhardt & Brigham, 2006) s= s= $2.12/$30.29 + 0.060 = 0.070 + 0.060 = 13%. f. What would the stock price be if its dividends were expected to have zero growth (Ehrhardt & Brigham, 2006) 0 1 2 3 | | | | 2.00 2.00 2.00 1.77 1.57 1.39 . . . P0 = 15.38 P0 = PMT/r = $2.00/0.13 = $15.38. g. Now assume that Temp Force is expected to experience supernormal growth of 30% for the next 3 years, then to return to its long-run constant growth rate of 6%. What is the stock's value under these conditions What is its expected dividend yield and capital gains yield in Year 1 In Year 4 (Ehrhardt & Brigham, 2006) 0 1 2 3 4 | | | |...What is the required rate of return on the firm's stock (Ehrhardt & Brigham, 2006) g. Now assume that Temp Force is expected to experience supernormal growth of 30% for the next 3 years, then to return to its long-run constant growth rate of 6%. What is the stock's value under these conditions What is its expected dividend yield and capital gains yield in Year 1 In Year 4 (Ehrhardt & Brigham, 2006) The dividend yield in year 1 is 4.80 percent, and the capital gains yield is 8.2 percent. After year 3, the stock becomes a constant growth stock, with g = capital gains yield = 6.0% and dividend yield = 13.0% - 6.0% = 7.0%. h. Is the stock price based more on long-term or short-term expectations Answer this by finding the percentage of Temp Force's current stock price based on dividends expected more than 3 years in the future (Ehrhardt & Brigham, 2006). i. Suppose Temp Force is expected to experience zero growth during the first 3 years and then to resume its steady-state growth of 6% in the fourth year. What is the stock's value now What is its expected dividend yield and its capital gains yield in Year 1 In Year 4 (Ehrhardt & Brigham, 2006) j. Finally, assume that Temp Force's earnings and dividends are expected to decline by a constant 6% per year, that is, g = -6%.