GROUP ASSIGNMENT COVER SHEET

STUDENT DETAILS

Student name: Bạch Ngọc Hà Linh Student ID number: 21000765

Student name: Nguyễn Trần Phương Minh Student ID number: 21001212

Student name: Nguyễn Việt Hải Student ID number: WSU21000312

Student name: Nghiêm Thị Tuyết Ngân Student ID number: 21001006

Student name: Trần Ngọc Phương Trâm Student ID number: 21000487

Student name: Trần Nguyễn Phương Trinh Student ID number: WSU21000201

Student name Vũ Đức Trung Student ID number: 21001387

UNIT AND TUTORIAL DETAILS

Unit name: Corporate Finance Unit number: CF-T322WSB-3

Tutorial/Lecture: 72-hour Take-home Exercise Class day and time: Tuesday: 12:00 - 15:15
Lecturer or Tutor name: Dr. Từ Thị Kim Thoa
ASSIGNMENT DETAILS

Title: [CF-T322WSB-3] – [Take-home Exercise No. 4] - [Group 2]

Length: Due date: 02/11/2022 Date submitted: 02/11/2022

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Student’s signature: Linh

Student’s signature: Hai
Student’s signature: Minh
Student’s signature: Ngan
Student’s signature: Tram
Student’s signature: Trinh
Student’s signature: Trung
Note: An examiner or lecturer / tutor has the right to not mark this assignment if the above declaration has not
been signed.
 Exercise 4

Part A: Assume that Bon Temps has a beta coefficient of 1.4, that the risk-free rate (the yield on
T-bonds) is 3%, and that the required rate of return on the market is 8%. What is Bon Temps's
required rate of return?
R = 𝑅𝐹+ β x (𝑅𝑀- 𝑅𝐹)
= 0.03 + 1.4 x (0.08 - 0.03)
= 0.10
⇒ The Bon Temps’s required rate of return is 10%

Part B: Assume that Bon Temps is a constant growth company whose last dividend (D0, which
was paid yesterday) was $2.20 and whose dividend is expected to grow indefinitely at a 4% rate.
(1) What is the firm's expected dividend stream over the next 3 years?
(2) What is its current stock price?
(3) What is the stock’s expected value one year from now?
(4) What are the expected dividend yield, capital gains yield, and total return during the first
year?

(1) : 𝐷𝑛 = 𝐷(𝑛−1) * (1+g)

Dividend of Year 0 2.20

Dividend of Year 1 2.20 * (1+0.04) = 2.29

Dividend of Year 2 2.29 * (1+0.04) = 2.38

Dividend of Year 3 2.38 * (1+0.04) = 2.48

𝐷1 2.29
(2) Present value of stock price 𝑃0 = 𝑅−𝐺
= 0.10−0.04
= $ 38.17

(3) Expected value of stock price 1 year from now:

𝐷2 2.38
⇒ 𝑃1= 𝑅−𝐺
= 0.10−0.04
= $ 39.67

(4) Expected value of dividend yield:

𝐷1 2.29
⇒ 𝑃0
= 38.17
= 0.06 = 6%
Capital gains yield:
 𝑃1−𝑃0 39.67−38.17
⇒ 𝑃0
= 38.17
= 0.04 = 4%
Total return during the first year:
𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑔𝑎𝑖𝑛 𝑦𝑖𝑒𝑙𝑑 + 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑓𝑖𝑟𝑠𝑡 𝑦𝑒𝑎𝑟 (𝑃1−𝑃0) + 𝐷1 (39.67−38.17) + 2.29
⇒ 𝑃𝑉 𝑜𝑓 𝑠𝑡𝑜𝑐𝑘
= 𝑃0
= 38.17

= 0.1 = 10%

Part C: Now assume that the stock is currently selling at $40.00. What is its expected rate of
return?
𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑃𝑎𝑦𝑚𝑒𝑛𝑡
𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑅𝑎𝑡𝑒 𝑜𝑓 𝑅𝑒𝑡𝑢𝑟𝑛 = 𝑆𝑡𝑜𝑐𝑘 𝑃𝑟𝑖𝑐𝑒
+ 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝐺𝑟𝑜𝑤𝑡ℎ 𝑅𝑎𝑡𝑒
2.29
⇒ 𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑅𝑎𝑡𝑒 𝑜𝑓 𝑅𝑒𝑡𝑢𝑟𝑛 = 40 + 4% = 9. 73%

Part D: What would the stock price be if its dividends were expected to have zero growth?
𝐷𝑖𝑣 $2.20
𝑆𝑡𝑜𝑐𝑘 𝑃𝑟𝑖𝑐𝑒 = 𝑟
= 10%
= $22

Part E: Now assume that Bon Temps' dividend is expected to grow 30% the first year, 20% the
second year, 10% the third year, and return to its long-run constant growth rate of 4%. What is
the stock’s value under these conditions? What are its expected dividend and capital gains yields
in Year 1? In Year 4?

Dividend of Year 0 2.2

Dividend of Year 1 2.2 x 0.3 + 2.2 = 2.86

Dividend of Year 2 2.86 x 0.2 + 2.86 = 3.43

Dividend of Year 3 3.43 x 0.1 + 3.43 = 3.77

Dividend of Year 4 3.77 x 0.04 + 3.77 = 3.92

Expected value of stock in year 3:

𝐷4 3.92
⇒ 𝑃3 = 𝑅−𝐺4
= 0.1−0.04
= $ 65.33
The stock’s value under these conditions would be:
𝐷1 𝐷2 𝐷3 𝑃3
⇒ 𝑃0 = (1+𝑟)
+ 2 + 3 + 3
(1+𝑟) (1+𝑟) (1+𝑟)
2.86 3.43 3.77 65.33
= (1+0.1)
+ 2 + 3 + 3
(1+0.1) (1+0.1) (1+0.1)
= $ 57.35

Dividend yield in year 1:

𝐷1 2.86
⇒ 𝑃0
= 57.35
= 0. 05 = 5%

Capital gains yield in year 1:

⇒ 𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑟𝑒𝑡𝑢𝑟𝑛 − 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑦𝑖𝑒𝑙𝑑 𝑦𝑒𝑎𝑟 1 = 0. 1 − 0. 05 = 0.05

Dividend yield in year 4:

𝐷4 3.92
⇒ 𝑃3
= 65.33
= 0. 06 = 6%

Capital gains yield in year 4:

⇒ 𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑟𝑒𝑡𝑢𝑟𝑛 − 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑦𝑖𝑒𝑙𝑑 𝑦𝑒𝑎𝑟 4 = 0. 1 − 0. 06 = 0.04

Part F: Suppose Bon Temps is expected to experience zero growth during the first 3 years and
then resume its steady-state growth of 4% in the fourth year. What would be its value then? What
would be its expected dividend and capital gains yields in Year 1? In Year 4?

Zero growth ⇒ 𝐷0= 𝐷1= 𝐷2= 𝐷3 = $ 2.2

Expected value of stock price year 4:

𝐷4 2.2*(1+0.04)
⇒ 𝑃3 = 𝑅−𝐺
= 0.1−0.04
= $ 38. 13

Present value of stock:

𝐷1 𝐷2 𝐷3 𝑃3
⇒ 𝑃0 = (1+𝑟)
+ 2 + 3 + 3
(1+𝑟) (1+𝑟) (1+𝑟)

2.2 2.2 2.2 38.13

= (1+0.1)
+ 2 + 3 + 3
(1+0.1) (1+0.1) (1+0.1)
= $ 34.12

Dividend yield in year 1:

 𝐷1 2.2
⇒ 𝑃0
= 34.12
= 0. 064 = 6. 4%

Capital gains yield in year 1:

⇒ 𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑟𝑒𝑡𝑢𝑟𝑛 − 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑦𝑖𝑒𝑙𝑑 = 0. 1 − 0. 064 = 0.036

Dividend yield in year 4:

𝐷4 2.2 * 0.04 + 2.2
⇒ 𝑃3
= 38.13
= 0.06 = 6%

Capital gains yield in year 4:

⇒ 𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑟𝑒𝑡𝑢𝑟𝑛 − 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑦𝑖𝑒𝑙𝑑 𝑦𝑒𝑎𝑟 4 = 0. 1 − 0. 06 = 0. 04

Part G: Finally, assume that Bon Temps’s earnings and dividends are expected to decline at a
constant rate of 4% per year, that is, g = -4%. Why would anyone be willing to buy such a stock,
and at what price should it sell? What would be its dividend and capital gains yields in each
year?

Stock Value:
𝐷1 𝐷0 ×(1+𝑔) 2.2 ×(1 −0.04)
𝑃0 = 𝑟−𝑔
= 𝑟−𝑔
= 0.1+0.04
= $15.09
The stock still has intrinsic value although its growth rate is negative. The investors are still
willing to pay for the stock since it still pays dividend but at a lower rate.
Dividend Yield:
𝐷1 𝐷0×(1+𝑟) 2.2 ×(1−0.04)
𝑃0
= 𝑃0
= 15.09
= 0. 14= 14%
Capital Gain Yield: Total return - dividend yield = 10% - 14% = -4%

Part H: Suppose Bon Temps embarked on an aggressive expansion that requires additional
capital. Management decided to finance the expansion by borrowing $40 million and by halting
dividend payments to increase retained earnings. Its WACC is now 8%, and the projected free
cash flows for the next 3 years are -$5 million, $10 million, and $20 million. After Year 3, free
cash flow is projected to grow at a constant 5%. What is Bon Temps’s market value of
operations? If it has 10 million shares of stock, $40 million of debt and preferred stock
combined, and $5 million of nonoperating assets, what is the price per share?

Summarize:
 R 8%

g 5%

𝐹𝐶𝐹1 -$5,000,000

𝐹𝐶𝐹2 $10,000,000

𝐹𝐶𝐹3 $20,000,000

Number of Share Outstanding $10,000,000

Debt and preferred stock $40,000,000

𝐷3 × ( 1 + 𝑔 ) 20,000,000 × ( 1 + 5% )
𝑃3 = 𝑅−𝑔
= 8% − 5%
= $700, 000, 000

Market value of operations:

𝐷1 𝐷2 𝐷3 𝑃3
𝑃0 = 1+𝑅
+ 2 + 3 + 3
(1+𝑅) (1+𝑅) (1+𝑅)

−5,000,000 10,000,000 20,000,000 700,000,000

= 1 + 8%
+ 2 + 3 + 3 = $575, 502, 972. 1
(1+8%) (1+8%) (1+8%)
Price per share:

- Equity Value = Market value of operations - Debt and preferred stock

= 575,502,972.1 - 40,000,000 = $535,502,972.1

𝐸𝑞𝑢𝑖𝑡𝑦 𝑣𝑎𝑙𝑢𝑒 535,502,972.1

- Price per share = 𝑇ℎ𝑒 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑆ℎ𝑎𝑟𝑒 𝑂𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔
= 10,000,000
= $53. 55

⇒ So, the Bon Temps’s market value of operations is $535,502,972.1 and its price per share is
$53.55.

Part I: Suppose Bon Temps decided to issue preferred stock that would pay an annual dividend
of $6 and that the issue price was $100 per share. What would be the stock's expected return?
Would the expected rate of return be the same if the preferred was a perpetual issue or if it had a
20-year maturity?
Stock’s expected Return:
𝐷 6
𝑅 = 𝑁𝑃𝐼
= 100
= 0. 06 = 6%
Yes, the expected rate of return will be the same if the preferred stock had a 20-year maturity.