As a reminder, you will continue to play the role of a consultant who has been hired by a mid-sized company that recently went public to provide some recommendations related to their short-term and long-term financial needs. Your first project is to analyze the short- and long-term capital budget needs of the.
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Provide the company owner with a 1-page executive summary of your findings and recommendations. Address the following in your executive summary:
1. Briefly identify the purpose of your report.
2. Concisely summarize the results of your financial analysis of the companys short- and long-term capital budget needs.
3. Synthesize your recommendations for how the company can raise money in the short-term and long-term to continue to add value to the organization.
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Use the Excel spreadsheet in the files area and discuss the calculations.
1. CAPM and Required Return: The company has a beta of 1.1, and the closest competitor has a beta of 0.30. The required return on an index fund that holds the entire stock market is 11%. The risk-free rate of interest is 4.5%. By how much does your companys required return exceed your competitors required return?
2. Constant Growth Valuation: The company is expected to pay a $1.80 per share dividend at the end of the year (i.e., D1 = $1.80). The dividend is expected to grow at a constant rate of 4% a year. The required rate of return on the stock, rs, is 10%. What is the stocks current value per share?
3. Nonconstant Growth Valuation: The company recently paid a dividend, D0, of $2.75. It expects to have nonconstant growth of 18% for 2 years followed by a constant rate of 6% thereafter. The firms required return is 12%.
