FINANCIAL MANAGEMENT I ASSIGNMENT(BLOCK II)
QUESTION 1: Supernormal Growth Shares:
Network Manufacturing is considering a cash purchase of the stock of Grind Tools. During the year just completed, Grindearned $4.25 per share and paid cash dividends of $2.55 per share.
Grind earnings and dividends are expected to grow at 25% per year for the next 3 years, after which they are expected to grow at 10% per year to infinity.
What is the maximum price per share that Network should pay for Grind if it has a required return of 15% on investments with risk characteristics similar to those of Grind?
QUESTION 2: Supernormal Growth Shares:
Value- Chain Inc., has been growing at a phenomenal rate of 30 percent per year because of its rapid expansion and explosive sales.
You believe that this growth rate will last for three more years and that the rate will then drop to 10 percent per year.
If the growth rate then remains at 10 percent indefinitely, what is the total value of the stock? Total dividends just paid were $5 million, and the required return is 20 percent.
Assuming there are 20 million outstanding shares, what would the price per share be?
QUESTION 3: Bond Valuation:
Rainbow Industries has outstanding, a $1,000 par-value bond with an 8% coupon interest rate. The bond has 12 years remaining to its maturity date.
a. If interest is paid annually, find the value of the bond when the required return is
(1) 7%, (2) 8%, and (3) 10%.
b. Indicate for each case in part a whether the bond is selling at a discount, at a premium,
or at its par value.
c. Using the 10% required return, find the bonds value when interest is paid semi-annually.
