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Assignment Question(s):

Q1: Alaman Corp. just paid a dividend of $2.15 yesterday. The company is expected to grow

at a steady rate of 5 percent for the foreseeable future. If investors in stocks of companies like

Alaman require a rate of return of 15 percent, what should be the market price of Alaman's

stock?

Answer

To calculate what should Alaman's market stock price, Gordon's Growth Model is used, and

it states as follows;

𝐷1

Po = {𝐾𝑒−𝑔}

Where; Po is the estimated price of the stock.

D1 is the required dividend.

Ke is the required cost of capital.

g is growth rate of the given dividends.

Therefore, for Alaman Corp. applying the model equation for the first year, we get;

D1 = Do * (1+g) = $2.15 * (1+0.05) = 2.26 (2dp).

Ke = 15% and g = 5%

Thus; Po =

2.26

{15%−5%}

=

2.26

10

( )

100

=

2.26

0.10

= $ 22.6

The market price for Alaman Corp. should be $22.6

Q2: Carrefour is expecting its new center to generate the following cash flows:

Years

Initial

Investment

Net operating

cash flows

0

1

2

3

4

5

($35,000,000)

$6,000,00 $8,000,00 $16,000,00 $20,000,00 $30,000,00

0

0

0

0

0

a. What is the payback period for this new center?

The payback period refers to the time required to recover the initial investment fully.

For irregular periods, it is calculated using the formula below (Jan, 2019).

𝑃𝑎𝑦𝑏𝑎𝑐𝑘 𝑃𝑒𝑟𝑖𝑜𝑑 = 𝐴 +

𝐵

𝐶

A = the year last negative cash flow, B = the absolute value/figure at the end of year A, and C

= the total cash flow in the period after period A.

For the Carrefour cumulative net operating cash flows will be as follows.

Year

Yearly Cash Flows

Accumulative or Net Cash Flows

0

-35,000,000

-35,000,000

1

6,000,000

-29,000,000

2

8,000,000

-21,000,000

3

16,000,000

-5,000,000

4

20,000,000

15,000,000

5

30,000,000

45,000,000

Thus the payback period for the company is

𝐴+

𝐵

𝐶

=3 + (

5,000,000

20,000,000

) = 3 +

1

4

= 3.25 Years

b. Calculate the net present value using a cost of capital of 15 percent. Should t...