Question

please answer using indo below

Angela Garcia, the chief financial officer for JTR Incorporated, was given the task of assessing the impact of a proposed risky investment on the firm's stock value. To perform the analysis, Angela gathered the following information on the firm's stock. During the immediately preceding 4 years, the annual dividend paid on the firm's common stock had grown from $2.45 to $3.00 (DO), a 7% growth rate. Ms. Garcia believes that without the proposed investment, the historical annual dividend growth rate will continue into the future. Currently the required rate of return on the common stock is 12%. Ms. Garcia's research indicates that if the proposed investment is undertaken, the coming year's dividend will rise to $3.33 per share and the annual rate of dividend growth will increase to 11%. She feels that in the best case, the dividend would continue to grow at this rate each year forever into the future. In the anticipated case, the 11% annual rate of dividend growth would continue for only two years, and then at the beginning of the third year the dividend growth rate would return to the 7% rate that was experienced over the past four years. In the worst case, the firm's growth rate will drop to one percent, due to the use of valuable managerial resources in an unsuccessful venture. As a result of the increased risk associated with the proposed risky investment, the required rate of return on the common stock is expected to increase by 3% to an annual rate of 15%. This required rate of return applies regardless of which dividend growth outcome occurs. Armed with the preceding information, Angela must now assess the impact of the proposed risky investment on the market value of JTR Inc.' stock.

Answer 1

First list down the given information provided in the question:

Current scenario, when no new project has been undertaken

Current dividend (D₀) - $3.00

Growth rate (g) - 7%

Required rate of return (k) - 12%

Calculation based upon dividend growth model or dividend discount model or Gordon growth model

Current value per share (P₀) = D₁/(k-g)

D₁ = D₀*(1+g)

= $3*(1+0.07)

= $3.21

P₀ = $3.21 / (0.12-0.07)

   = $3.21 / 0.05

   = $64.20

Please find below the replies required in seriatim:

D₁ = $3.21

D₂ = D₁ * (1+g)

   = $3.21 * (1+0.07)

   = $ 3.43

Note: For simplification purposes, answer rounded off to two decimal places

D₃ = D₂ * (1+g)

   = $3.43 * (1+0.07)

   = $ 3.67

Note: For simplification purposes, answer rounded off to two decimal places

r_s = k = required rate of return

   = 12%

g = growth rate (as provided in question)

= 7%

P₀ = current market price (as calculated above)

= $64.20

Trust you have found the same in order.

In case of any further clarifications required, please feel free to comment.