Question

The investment banking firm of Einstein & Co. will use a dividend valuation model to appraise...

The investment banking firm of Einstein & Co. will use a dividend valuation model to appraise the shares of the Modern Physics Corporation. Dividends (D1) at the end of the current year will be $1.80. The growth rate (g) is 8 percent and the discount rate (Ke) is 12 percent.

  
a. What should be the price of the stock to the public? (Do not round intermediate calculations and round your answer to 2 decimal places.)
  


b. If there is a 6 percent total underwriting spread on the stock, how much will the issuing corporation receive? (Do not round intermediate calculations and round your answer to 2 decimal places.)
  


c. If the issuing corporation requires a net price of $43.50 (proceeds to the corporation) and there is a 6 percent underwriting spread, what should be the price of the stock to the public? (Do not round intermediate calculations and round your answer to 2 decimal places.)

Homework Answers

Answer #1
Requirement (a) :
DIVIDEND END OF CURRENT YEAR (D1) =$1.80
GROWTH (G) = 8%
DISCOUNT RATE (Ke) =12%
STOCK PRICE = D1 /(Ke - G)
= $1.80 / (12% - 8%)
   = $45
Requirement (b) :
UNDERWRITTING SPREAD = 6%
NET AMOUNT RECEIVED BY CORPORATION = $45- (6% * $45)
= $45-$2.7
= $42.3
Requirement ©:
CORPORATION REQUIRES NET PRICE = $43.5
UNDERWRITTING SPREAD = 6%
STOCK PRICE TO THE PUBLIC = ($43.5 / 94%) * 100%
= $46.28
EXPLANATION:-
LET THE ISSUE PRICE BE =$100
UNDERWRITTING SPREAD = 6%
NET PRICE RECEIVED BY CORPORATION = $94
WHEN CORPORATION RECEIVES $94 ISSUE PRICE IS =$100
WHEN CORPORATION RECEIVES $43.5 ISSUE PRICE = $100 / $94 * $43.5
$   46.28
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