Finance Assignment 2

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NONCONSTANT GROWTH Assume that it is now January 1, 2012. Wayne-Martin Electric Inc. (WME) has developed a solar panel capable of generating 200% more electricity than any other solar panel currently on the market. As a result, WME is expected to experience a 15% annual growth rate for the next 5 years. Other firms will have developed comparable technology at the end of 5 years, and WME’s growth rate will slow to 5% per year indefinitely. Stockholders require a return on 12% on WME’s stock. The most recent annual dividend (D0), which was paid yesterday, was $1.75 per share.

a. Calculate WME’s expected dividends for 2012, 2013, 2014, 2015, and 2016.

d. How might an investor’s tax situation affect his or her decision to purchase stocks of companies in the early stages of their lives, when they are growing rapidly, versus stocks of older, more mature firms? When does WME’s stock become “mature” for purposes of this question?

e. Suppose your boss tells you that she believes that WME’s annual growth rate will be only 12% during the next 5 years and that the firm’s long-running growth rate will be only 4%. Without doing any calculations, what general effect would these growth rate changes have on the price of WME’s stock?

f. Suppose your boss also tell you that she regards WME as being quite risky and that she believes the required rate of return should be 14%, not 12%. Without doing any calculations, determine how the higher rate of return would affect the price of the stock, the capital gains yield, and the dividend yield. Again, assume that the long-run growth rate is 4%.

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WACC AND PERCENTAGE OF DEBT FINANCING Hook Industries’ capital structure consists solely of debt and common equity. It can issue debt at rd=11%, and its common stock currently pays a $2.00 dividend per share (Do=$2.00). The stock’s price is currently $24.75, its dividend is expected to grow at a constant rate of 7% per year, its tax rate is 35%, and its WACC is 13.95%. What percentage of the company’s capital structure consists of debt?