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Essay sample - CORPORATE FINANCE - Minicase
Pages 6 (1506 words)
Common stockholders are owners of the company, though of a very small part. As they own the company, they have the right to vote and elect the board of directors. Secondly they have the preemptive right, i.e. the right to buy any additional shares issued by the company.
What is the required rate of return on the firm's stock (Ehrhardt & Brigham, 2006)
g. Now assume that Temp Force is expected to experience supernormal growth of 30% for the next 3 years, then to return to its long-run constant growth rate of 6%. What is the stock's value under these conditions What is its expected dividend yield and capital gains yield in Year 1 In Year 4 (Ehrhardt & Brigham, 2006)
The dividend yield in year 1 is 4.80 percent, and the capital gains yield is 8.2 percent. After year 3, the stock becomes a constant growth stock, with g = capital gains yield = 6.0% and dividend yield = 13.0% - 6.0% = 7.0%.
h. Is the stock price based more on long-term or short-term expectations Answer this by finding the percentage of Temp Force's current stock price based on dividends expected more than 3 years in the future (Ehrhardt & Brigham, 2006).
i. Suppose Temp Force is expected to experience zero growth during the first 3 years and then to resume its steady-state growth of 6% in the fourth year. What is the stock's value now What is its expected dividend yield and its capital gains yield in Year 1 In Year 4 (Ehrhardt & Brigham, 2006)
j. Finally, assume that Temp Force's earnings and dividends are expected to decline by a constant 6% per year, that is, g = -6%. ...
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