Question # 01 (15 Marks)
Mr. Ashar is a financial manager in S&T Leather Company. He has been given the task of assessing the firm’s stock values. In order to perform the required assessment, he has analyzed that the firm’s common stock currently pays an annual dividend of Rs. 2.10 per share and the required return on the common stock is 11 percent.
Required:
By using the given information, estimate the value of common stock under each of the
following dividend-growth-rate assumption:
a) Dividends are expected to grow at an annual rate of 0% to infinity.
b) Dividends are expected to grow at a constant annual rate of 5% to infinity.
c) Dividends are expected to grow at an annual rate of 5% for each of the next three years
followed by a constant annual growth rate of 4% in fourth year to infinity.
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Question # 02 (15 Marks)
Standard Manufacturing Company has estimated cash revenues of Rs. 30,000 per year from a proposed project. Cash costs will be Rs. 20,000 (including taxes) per year. The company will wind up its business in 8 years. The plant, property and equipment will worth Rs. 2,000 as salvage value at the time of winding up the business. The project costs Rs. 40,000 to launch and opportunity cost associated with this project is 15%.
Required:
Keeping above information into consideration, you are required to find out:
a) Is this a good investment? Support your answer with complete calculations of NPV and
Payback period of the project.
b) What will be the effect on price per share of 1,000 shares from taking the investment?
