XYZ IT company
Find the value per share of the company'scommon stock ( the company had paid out a total of $1,500,000 in dividends (the number of share outstanding is 1 million ). In the company require return on 25% and the constant growth rate of 20%.), the CFO ask you the following ?
1.What should the per share value of the company's common stock be ? (dividends will continue to grow at a constant rate)
2. If the company will continue to grow at 20% for the next five years. After that, it is forecasted that growth rate will belower to 10%. This growth rate will then be sustained indefinitely. Based on this what is the company's common stock value per share?
3. The CFO is satisfied with your research, but, he is worried as the technology being developed carries more risk. He wants to know if the current discount rate of 25% is suitable. What will you tell him?
4. The company has issued bonds as well for long-term financing reasons. Today the bond is selling at a discount of $95.91 ($100 par value) on the open bond market. The bond makes semi-annual coupon payments at a coupon rate of 6%, and will mature in 5 years. A friend does not understand why the bond is selling for less than its par value. How would you explain this to him? Support your explanation by including the equation for how the market price would be calculated. What is the current market rate expressed on an annual basis?
5. If the company were considering issuing a new bond today, explain what coupon rate the firm should theoretically offer. Assume the newly issued bond would have the same characteristics of the previously issued one.