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(Solved) BASM 340: Applied Financial Management Homework Assignment 6 Bob and Doug McKenzie are senior vice presidents of Elsinore Brewery. They are...


#5 Now assume that the stock is currently selling at $40.00. What is the expected rate of return?

#6 What would the stock price be if its dividends were expected to have zero growth?

#7 Now assume that Grandview Brewery Supply Inc. dividend is expected to grow 30% the first year, 20% the second year, 10% the third year, and return to its long-run constant growth rate of 4%. What is the stock's value under these conditions? What are its expected dividend and capital gains yields in Year 1? Year 4?


Please explain in detail how to work-out these problems and how you came out with the answer, thank you.

BASM 340: Applied Financial Management
Homework Assignment 6
Bob and Doug McKenzie are senior vice presidents of Elsinore Brewery. They are co-directors of
the company’s pension fund management division, with Bob having responsibility for fixedincome securities (primarily bonds) and Doug being responsible for equity investments. A major
new client, the Yakima Valley Brewery, has requested that Elsinore Brewery present an
investment seminar to the executive officers of Yakima Valley brewery; and Bob and Doug, who
will make the actual presentation, have asked you to help them.
To illustrate the common stock valuation process, Bob and Doug have asked you to analyze the
Grandview Brewery Supply Inc., a supply company that supplies brewery equipment, yeast, and
hops to breweries around the world. You are asked to answer the following questions:
1. Briefly describe the legal rights and privileges of common stockholders.
2. Answer the following:
a. Write a formula that can be used to value any stock, regardless of its dividend
pattern.
b. What is a constant growth stock? How are constant growth stocks valued?
c. What are the implications if a company forecasts a constant g that exceeds its ? Will many stocks have expected g > in the short run (i.e. for the next few
years)? In the long run (i.e. forever)?
3. Assume Grandview Brewery Supply Inc. has a bet coefficient of 1.2, and that the riskfree rate (the yield on T-bonds) is 3%, and that the required rate of return on the market
is 8%. What is Grandview Brewery Supplies Inc. required rate of return?
4. Assume Grandview Brewery Supply Inc. is a constant growth company whose last
dividend (0 , which was paid yesterday) was $2.00 and whose dividend is expected to
grow indefinitely at a 4% rate.
a. What is the firm’s expected dividend stream over the next three years?
b. What is its current stock price?
c. What is the stock’s expected value 1 year from now?
d. What are the expected dividend yield, capital gains yield, and total return during
the first year?
5. Now assume that the stock is currently selling at $40.00. What is the expected rate of
return?
6. What would the stock price be if its dividends were expected to have zero growth?
7. Now assume that Grandview Brewery Supply Inc. dividend is expected to grow 30% the
first year, 20% the second year, 10% the third year, and return to its long-run constant
growth rate of 4%. What is the stock’s value under these conditions? What are its
expected dividend and capital gains yields in Year 1? Year 4?
8. What 80’s movie did Bob and Doug McKenzie star in?

 


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