Question

Problem 1 - please show your calculations

McGaha Enterprises expects earnings and dividends to grow at a rate of 25% for the next 4 years, after the growth rate in earnings and dividends will fall to zero, i.e., g = 0. The company's last dividend, D0 , was $1.25, its beta is 1.20, the market risk premium is 5.50%, and the risk-free rate is 3.00%.

What is the current price of the common stock?

Problem 2 : - show your work

The value of Broadway-Brooks Inc.'s operations is $900 million, based on the corporate valuation model. Its balance sheet shows $70 million in accounts receivable, $50 million in inventory, $30 million in short-term investments that are unrelated to operations, $20 million in accounts payable, $110 million in notes payable, $90 million in long-term debt, $20 million in preferred stock, $140 million in retained earnings, and $280 million in total common equity.

If the company has 25 million shares of stock outstanding, what is the best estimate of the stock's price per share?

Answer 1

As per CAPM

expected return = risk-free rate + beta * (Market risk premium)

Expected return% = 3 + 1.2 * (5.5)

Expected return% = 9.6

Year	Previous year dividend	Dividend growth rate	Dividend current year
1	1.25	25.00%	1.5625
2	1.5625	25.00%	1.953125
3	1.953125	25.00%	2.44140625
4	2.44140625	25.00%	3.051757813

Where
Current dividend =Previous year dividend*(1+growth rate)^corresponding year

Stock
Discount rate	0.096
Year	0	1	2	3	4
Cash flow stream	0	1.5625	1.953125	2.441406	3.0517578
Discounting factor	1	1.096	1.201216	1.316533	1.4429199
Discounted cash flows project	0	1.425639	1.625957	1.854421	2.1149877
NPV = Sum of discounted cash flows
NPV Stock =	7.02
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor

Please ask remaining parts seperately, questions are unrelated