Question

1. Best Buy has just paid a dividend of $4 per share (this dividend is already paid therefore it is not included in the current price). The companys dividend is estimated to grow at a rate of 35% in year 1 and 20% in year 2. The dividend is then expected to grow at a constant rate of 9.8% thereafter. The companys opportunity cost of capital is 12% what is the current value of Best Buy stock?

2. General Foods is forecasted to have a beta (measure of market risk) of 1.2 next year. The risk free rate over the next year is expected to be 1%. The return on the market is expected to be 8%. What is the required return of General Foods based on the firms market risk, calculate the return using the capital asset pricing model? (Similar to part c in the case and this material is covered in chapter 8 on pages 282-287). Write your answer as a decimal.

3. Suppose Best Buy company is forecasting a constant annual decline in its dividends of 4% (i.e. the constant growth rate is -4%). What price would you expect to pay for the stock with a 9.6% required rate of return and an annual dividend of $3 which will be paid next year?

4. Suppose General Foods has decided to enter the soda business and they will require additional capital. Management will finance the project by borrowing $100 million and by haulting dividend payments. Management forecasts that free cash flow for the next two years will be -$50, and $35 million. After year 2 the cash flows will grow at a rate of 4%. The current WACC for General foods is 9.7%. What is the firms price per share given there are 50 Million Shares outstanding?

Answer 1