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TTY Corporation has just paid a dividend of $2.30 per share.

Added on - 20 Sep 2019

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3.TTY Corporation has just paid a dividend of $2.30 per share. This dividend is expected togrow by 15% next year, 10% the year after that, and then dividend growth will level off andgrow in perpetuity at 5%. You believe that the company’s cost of equity capital is 16.5%.The company’s bonds are rated as “AA” by Standard & Poor’s.What is your estimate of the intrinsic value of TTY Corporation?If the company’s bond rating were to fall to “C”, would you expect the cost of equityto fall or rise? Why? What would this do to the price of the stock?What is thepercentage changein the value of TTY stock if the final growth rate ofdividends, currently at 5%, rises to 6%, or falls to 4%?
4) Xterra, Inc. has the following:Operating Earnings$1,240,000Shares outstanding1,000Depreciation$44,000Changes in Working Capital25,000Other Operating Costs$34,000Cost of equity14%Tax Rate24%Bonds outstanding$500,000Coupon rate on bonds5%Capital expenditures$100,0001.Calculate Xterra’s Free cash flow to equity (FCFE) per share.2.If FCFE is expected to grow at 4% per year indefinitely, calculate the intrinsic price of thecompany’s shares3.Give three situations in which would want to use the FCFE approach instead of theDividend Discount Model (DDM) to value a stock.
5)The board of Directors of a company is considering an incentive plan for its new president.They are considering paying a cash bonus equal to the president’s salary times (1+ROE) eachyear for the next five years. Using the Dupont decomposition of ROE, give two advantages andtwo disadvantages of this plan.
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