GROUP ASSIGNMENT COVER SHEET

STUDENT DETAILS

Student name: Nguyễn Khánh Vi Student ID number: 22004094

Student name: Nguyễn Hồng Phương Vi Student ID number: 22003226

Student name: Nguyễn Kim Thu Student ID number: 22003022

Student name: Bùi Minh Trương Student ID number: 23005794

Student name: Nguyễn Việt Hưng Student ID number: 22002460

Student name: Lê Đức Mạnh Student ID number: 22003687

UNIT AND TUTORIAL DETAILS

Unit name: Unit number:

Tutorial/Lecture: Class day and time:
Lecturer or Tutor name:

ASSIGNMENT DETAILS

Title: 72-hour Take-home Exercise 4

Length: Due date: 30/01/2024 Date submitted: 01/02/2024

DECLARATION
✔ I hold a copy of this assignment if the original is lost or damaged.
✔ I hereby certify that no part of this assignment or product has been copied from any other
student’s work or from any other source except where due acknowledgement is made in the
assignment.
✔ I hereby certify that no part of this assignment or product has been submitted by me in
another (previous or current) assessment, except where appropriately referenced, and with
prior permission from the Lecturer / Tutor / Unit Coordinator for this unit.
✔ No part of the assignment/product has been written/ produced for me by any other
person except where collaboration has been authorised by the Lecturer / Tutor /Unit
Coordinator concerned.
✔ I am aware that this work may be reproduced and submitted to plagiarism detection software
programs for the purpose of detecting possible plagiarism (which may retain a copy on its
database for future plagiarism checking).
Student’s signature: Khánh Vi
Student’s signature: Vi
Student’s signature: Thu
Student’s signature: Trương
Student’s signature: Hưng
Student's signature Mạnh

Note: An examiner or lecturer/tutor has the right to not mark this assignment if the above declaration
has not been signed.

Take-home Exercise No. 4

Part A
Assume that Bon Temps has a beta coefficient of 1.35, that the risk-free rate (the yield on T-bonds)
is 3%, and that the required rate of return on the market is 8%. What is Bon Temps's required rate
of return?

= 3% + 1.35 × ( 8% - 3%)= 9.75%

Part B
Assume that Bon Temps is a constant growth company whose last dividend (D0, which was paid
yesterday) was $2.60 and whose dividend is expected to grow indefinitely at a 4% rate.

(1) What is the firm's expected dividend stream over the next 3 years?

Dividends in the next 3 years:

𝐷1 = 𝐷0 𝑥 (1 + 𝑔) = 2.6 x (1 + 4%) = $2.704
2 2
𝐷2 = 𝐷0 𝑥 (1 + 𝑔) = 2. 6 𝑥 (1 + 4%) = $2.81216
3 3
𝐷3 = 𝐷0 𝑥 (1 + 𝑔) = 2. 6 𝑥 (1 + 𝑔) = $2.925

(2) What is its current stock price?

𝐷1 2.704
𝑃0 = 𝑅−𝑔
= 9.75%−4%
= $47,026

(3) What is the stock’s expected value one year from now?

𝐷2 2.81216
𝑃1 = 𝑅−𝑔
= 9.75%−4%
= $48,907

(4) What are the expected dividend yield, capital gains yield, and total return during the first year?

𝐷1 2.704
- Expected dividend yield: 𝑃0
= 45.067 = 6%
𝑃1 48.75
- Capital gains: 𝑃0
-1= 45.067
-1 = 8.2%
- Total yield: Dividend yield + Capital yield = 6% + 8.2%= 14.2%
Part C
Now assume that the stock is currently selling at $40.00. What is its expected rate of return?
Growth rate g = 4%

Dividend at first year: 𝐷1 = 𝐷0 𝑥 (1 + 𝑔) = 2.6 x (1 + 4%) = $2.704

𝐷1 $2.704
Expected rate of return would be 𝑅 = 𝑃
+ 𝑔= $40
+ 4% = 0.1076 = 10.76%

Part D
What would the stock price be if its dividends were expected to have zero growth?

Return rate R = 9.75%

Dividend last paid = $ 2.6
𝐷 $2.6
Stock Price: P = 𝑅
= 10.76%
= $26.67
=> The stock price if its dividends were expected to have zero growth would be 𝑃 = $ 26.67

Part E
Now assume that Bon Temps's dividend is expected to grow 30% the first year, 20% the second
year, 10% the third year, and return to its long-run constant growth rate of 4%. What is the stock’s
value under these conditions? What are its expected dividend and capital gains yields in Year 1? In
Year 4?

Growth rate from year 4: g = 4%

Return rate: R = 9.75 %

Dividend at year 1

𝐷 1 = 𝐷 0 × (1 + 𝑔 1) = 2. 6× (1 + 30%) = $ 3.38

Dividend at year 2

𝐷 2 = 𝐷 1 × (1 + 𝑔 2) = 3.38 × (1 +10%) = $ 3.718

Dividend at year 3

𝐷 3 = 𝐷 2 × (1 + 𝑔 3) = 3. 718 × (1 + 4%) = $ 3.86672

Stock Price in year 3

𝐷3×(1+𝑔) 3.86672×(1+4%)
𝑃3 = 𝑅−𝑔
= (9.75%−4%)
= $69.94

The stock’s value under these condition

 𝐷1 𝐷2 𝐷3 𝑃3
𝑃= (1+𝑅)
+ 2
+ 3
+ 3
(1+𝑅) (1+𝑅) (1+𝑅)

3.38 3.718 3.86672 69.94

= (1+9.75%)
+ 2
+ 3
+ 3
(1+9.75%) (1+9.75%) (1+9.75%)

= $ 61.9962

The Dividend Yield

𝐷1 3.38
The dividend yield in year 1= 𝑃
= 61.9962
= 5. 45%

𝐷4 𝐷3×(1+𝑔) 3.86672×(1+4%)
The dividend yield in year 4= 𝑃3
= 𝑃3
= 69.94
= 5. 75%

Capital Gain Yield

Capital gain yield in year 1= Total Return - Dividend yield in year 1

= 9.75% - 5.45% = 4.3%

Capital gain yield in year 4= Total Return - Dividend yield in year 4

= 9.75% - 5.75% = 4%

Part F
Suppose Bon Temps is expected to experience zero growth during the first 3 years and then
resume its steady-state growth of 4% in the fourth year. What would be its value then? What
would be its expected dividend and capital gains yields in Year 1? In Year 4?

Growth rate from year 4: g = 4%

Return rate: R = 9.75 %

D0 = D1 = D2 = D3 = $2.6

Stock Price in year 3

𝐷3×(1+𝑔) 2.6×(1+4%)
𝑃3 = 𝑅−𝑔
= (9.75%−4%)
= $47.026

The stock’s value under these condition

𝐷1 𝐷2 𝐷3 𝑃3
𝑃= (1+𝑅)
+ 2
+ 3
+ 3
(1+𝑅) (1+𝑅) (1+𝑅)

2.6 2.6 2.6 47.026

= (1+9.75%)
+ 2
+ 3
+ 3
(1+9.75%) (1+9.75%) (1+9.75%)
 = $ 42.07

The Dividend Yield

𝐷1 2.6
The dividend yield in year 1= 𝑃
= 42.07
= 6. 18%

𝐷4 𝐷3×(1+𝑔) 2.6×(1+4%)
The dividend yield in year 4= 𝑃3
= 𝑃3
= 47/026
= 5. 75%

Part G
Finally, assume that Bon Temps’s earnings and dividends are expected to decline at a constant
rate of 4% per year, that is, g = -4%. Why would anyone be willing to buy such a stock, and at what
price should it sell? What would be its dividend and capital gains yields in each year?

The current price of the stock:

𝐷𝑜 𝑥 (1+𝑔) 2.6 𝑥 [1+(−4%)]

Po= 𝑅−𝑔
= 9.75%−(−4%)
= 18. 15

Dividend yield

𝐷1 2.6𝑥(1−4%)
𝑃𝑜
= 18.15
= 13. 75%

Capital gains yield = Total return − Dividend yield= 9.75%-13.75%= -4%

● Dividend yield is constant because capital gains yield is constant. People are willing
to purchase it because of the high ( 13. 75%) dividend yield, which helps to offset the
negative capital gains yield.
● The stock ought to be sold for $ 13. 75% a share if they attempt to sell it.

Part H
Suppose Bon Temps embarked on an aggressive expansion that requires additional capital.
Management decided to finance the expansion by borrowing $40 million and by halting dividend
payments to increase retained earnings. Its WACC is now 10%, and the projected free cash flows
for the next 3 years are -$5 million, $10 million, and $20 million. After Year 3, free cash flow is
projected to grow at a constant 5%. What is Bon Temps’s market value of operations? If it has 10
million shares of stock, $40 million of debt and preferred stock combined, and $5 million of
non-operating assets, what is the price per share?

Return rate = WACC = R = 10%

After year 4, g = 5%

Value at the end of year 3:

 𝐷 3
× (1 + 𝑔) 20 × (1 + 5%)
𝑃 3
= (𝑅 − 𝑔)
= (10% − 5%)
= $420 (𝑚𝑖𝑙𝑙𝑖𝑜𝑛)

𝐷 1
𝐷 2
𝐷 3
+𝑃 3
𝑃 = 1+𝑅
+ 1+𝑅
+ 1+𝑅
= $334. 3 (𝑚𝑖𝑙𝑙𝑖𝑜𝑛)

𝐸𝑞𝑢𝑖𝑡𝑦 − 𝐷𝑒𝑏𝑡 334.3 − 40

𝑃𝑃𝑆 = 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑠ℎ𝑎𝑟𝑒
= 10
= $29. 43

Part I
Suppose Bon Temps decided to issue preferred stock that would pay an annual dividend of $8.0
and that the issue price was $100 per share. What would be the stock's expected return? Would
the expected rate of return be the same if the preferred was a perpetual issue or if it had a 20-year
maturity?

g = 0%
D = $8.0
P = $100

The stock’s expected return would be:

𝐷 8.0
𝑅 𝑝𝑒𝑟𝑝𝑒𝑡𝑢𝑖𝑡𝑦
= 𝑃
+ 𝑔 = 100
+ 0 = 8%

If the preferred was a perpetual issue or if it had a 20-year maturity, the expected rate of return
would still be the same at R = 8%

We have:

𝐶 1 8.0 1
𝑃 𝑎𝑛𝑛𝑢𝑖𝑡𝑦
= 𝑅
× (1 − 𝑇 ) = 8%
× (1 − 20 ) = $78. 5
(1+𝑅) (1+8%)

𝐷 1 8.0
𝑅 𝑎𝑛𝑛𝑢𝑖𝑡𝑦
= 𝑃
= 78.5
= 10. 2%
𝑎𝑛𝑛𝑢𝑖𝑡𝑦