You Have Been Given the Following Information on AD Corporation,and

question 33

Essay

You have been given the following information on AD Corporation,and you expect this information to hold for the next five years: ROA = 20%; debt/equity ratio = 0.5; interest rate on debt = 10%; dividend payout ratio = 20%.After five years have passed,you expect AD's growth rate to be 10%.The annualized six-month T-bill rate is 7%,current EPS is $4.00,and the stock's beta is 1.25.Assume a market rate of return of 15%.
a. Using the dividend-discount model, estimate the intrinsic value of the stock.
b. The company's CFO is considering increasing his payout ratio to 40% for the first five years. Advise him by estimating the value of the stock with the new payout ratio.
c. The CFO is also considering increasing the debt/equity ratio to one. Estimate the value of the stock with the new ratio.

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Definitions:

Socio-Political Development

The process of change and evolution in society and politics, including improvements in political systems, social structures, and public policies.

South

A region in the United States characterized by its unique cultural, historical, and social aspects, often referring to the states that were part of the Confederacy during the Civil War.

Witchcraft Crisis

A period, particularly during the Salem witch trials in colonial Massachusetts, characterized by hysteria and the persecution of individuals accused of witchcraft.

Puritans

English Protestants from the 16th and 17th centuries who aimed to cleanse the Church of England of its Catholic customs.