 # FIN 101 Saudi Electronic University Alaman Corp Market Stock Price Worksheet

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Economics

Saudi electronic university

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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 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. b. Calculate the net present value using a cost of capital of 15 percent. Should the project be accepted? Answer Q3: Alfa corp has a capital structure which is based on 50% common stock, 20% preferred stock and 30% debt. The cost of common stock is 14%, the cost of preferred stock is 8% and the pre-tax cost of debt is 10%. The firm's tax rate is 40%. a. Calculate the WACC of the firm. b. The firm is considering a project that is equally as risky as the firm's current operations. This project has initial costs of \$280,000 and annual cash inflows of \$66,000, \$320,000, and \$133,000 over the next three years, respectively. What is the net present value of this project? Answer
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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?
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...  Anonymous
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