FIN 2360 SMU Compute the Expe

Question 1 (4 marks)

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Suppose a company has a preferred share issue and a common stock issue. Both have just paid a $2 dividend. Which do you think will have a higher price per share, a share of the preferred or a share of the common? Explain.

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Question 2 (10 marks)

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Simkins Inc has just developed a solar panel capable of generating 200% more electricity than any solar panel currently on the market. As a result, Simkins is expected to experience a 15% annual growth rate for the next 3 years. By the end of 3 years, other firms will have developed comparable technology, and Simkins growth rate will slow to 5% per year forever. Shareholders require a return of 12% on Simkins stock.The most recent annual dividend, which was paid yesterday, was $1.00 per share.

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  • Calculate the current market value of Simkins stock. Show your work! (4 Marks)
  • Calculate the expected market price in one year. Show your work! (4 Marks)
  • Calculate the expected dividend yield and capital gains yield expected during the first year. Show your work! (2 Marks)

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Question 3 (17 marks)

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You are the owner of A Rinky Dink Company and you have been very successful in your business undertakings and the company has been able to grow at a modest rate of 2%.You expect that the company will be able to sustain this growth rate into the future.The company has just paid its most recent dividend of $4.50 and you have calculated that investors in the past have required a 13 percent rate of return.

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a.Calculate the expected value of the share in the market today? Show your work! (3 marks)

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b.You observe that the current market price for the company shares is $35.31. Calculate the expected return that investors are expecting now. Show your work! (3 marks)

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c.Explain what happened. Show your work! (2 marks)

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d.A new long term project is being considered by the company.However, the project will increase the risk associated with the company and the required rate of return will increase and investors will require a 15 percent rate of return on their investment.However, the new project will provide growth of 15 percent per year for the next 5 years and then growth will return to its normal rate of 2 percent.Should the company invest in this new project? Show your work! (6 marks)

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e.Assuming the company takes on the project (even if you recommended that you don’t take on the project in part d), calculate the rate of increase or decrease from the current stock price in the market for the company’s common shares. Show your work! (3 marks)

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Problem 4. (6 marks)

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The Great Canadian Company Ltd. has $5,000,000 of $100 par value preferred shares issued and outstanding.The preferred shares pay a $10.00 dividend on June 4 each year and investors require a rate of return of 8 percent.

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a.If there is no maturity date, what is the expected price of the preferred share in the market June 4, 2021? Show your work! (3 marks)

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b.If there is a maturity date of June 4, 2026, what is the expected price of the preferred share in the market on June 4, 2021?Show your work!(3 marks)


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