Finance, Information Systems, & Management Science Please make sure to show all your work! Final answers without supporting work will receive a 0 mark. Total Marks: 60 Problem 1 (12 marks) Copper Inc. has outstanding cumulative preferred stock with a par value of $105.00. The shares pay an annual dividend of $6.00 per share. Analysts are considering two possible scenarios and dividend payout options, based on the company’s earnings outlook and market conditions. Scenario 1: There are no changes in market conditions or earning prospects and the company pays all preferred dividends on time. Scenario 2: The company has an opportunity to reinvest earnings into a project that will help grow earnings for the next 4 years. No dividends will be paid for the 4 years. The dividends will resume in year 5 with the payment of all back dividends as well as the current dividend. Subsequent dividends will be paid on time. Which of the two scenarios will result in a higher current value of the stock? Assume a required rate of return of 13%. Show your work. Problem 2 (9 marks) Horse and Buggy Inc. is in a declining industry. Sales, earnings, and dividends are all shrinking at a rate of 10% per year. Investors have a required return of 15% and the next dividend is expected to be $3. a. What is the value of a share? b. What price do you forecast for the stock next year? c. Calculate the dividend yield and the capital gain (loss) yield. Problem 3 (11 marks) Tesla Inc. has been going through a very aggressive growth phase. Because of this, the company has never declared dividends on its common stock. Management also intends on retaining all future earnings to finance current and future growth and therefore, do not anticipate paying any cash dividends in the foreseeable future. The company’s shares are currently valued at $420.43 each and the current annual earnings per share is $0.90. The 1 number of common shares issued and outstanding is 933.54 million. The estimated sales total for the current year is $9.7 billion. The company’s earnings forecast for the next 12 months are as follows: - A median estimate of a decrease of 9.62% - A high estimate of a 90.3% increase A low estimate of a 90.5% decrease Based on the earnings forecast, calculate the median, high and low values of Tesla’s shares 12 months from now. Problem 4 (22 marks) Nature’s Friend Co. is a young eco-friendly paper, personal care, and cleaning product company that newly listed on the TSX Venture Exchange. Because the company is growing at a significantly high rate, management would like to reinvest all profits generated over the next 7 years back into operations. As such, no dividend will be paid over this period. The company however expects to pay dividends after that, starting with a $1.50 dividend at the end of year 8. The company also expects to be able to keep the dividends growing at the pace of the earnings, at 25% for the 5 years after the first dividend (years 9 to 13), lowering slightly to 20% for the following 2 years, and then stabilizing at a sustainable growth rate of 5% thereafter. Because of the high risk of young companies like Nature’s Friend, investors required a rate of return of 20% on their investment. How much would you be willing to pay for Nature’s Friend Co.’s shares? Problem 5 (6 marks) Bakers Inn is a mature company that has experienced modest success over that last few years. Over the last few years, the company’s earnings have grown at a modest rate of 3.5%. It is expected that the company will be able to sustain this growth rate into the future. The company expects to pay a dividend of $3.68 this year. If investors in the past have required a 11.5 percent rate of return on the company’s stock, a. Calculate the expected value of the share in the market today? (3 marks) b. You observe that the current market price for the company shares is $43.35. Calculate the expected return that investors are expecting based on this price. (3 marks) 2 
Purchase answer to see full attachment