SUAREZ MANUFACTURINGIMPACT OF A PROPOSED RISKY IN INVESTMENT

ON STOCK VALUE

Vu Huong Giang - MA0N0211

Case

Early 2010, CFO had to assess the impact of a proposed risky investment on the firm’s stock value

Annual dividends in 5 years (2005-2009): 2009 $1.90 2008 1.70 2007 1.55 2006 1.40 2005 1.30

Case

Expected dividend by the end of 2010 = $2.09

Required return = 14% Historical annual rate of growth will

continue in the future => constant rate=> Current value per share = ?

Case

Calculating g – constant rate of growth:D2005/D2009 = 1/(1+g)4 = PIVFg,4

Þ PIVFg,4 ~ 0.683Þ g = 10%Þ current value P0 = D2010/(rs – g)

= 2.09/ (0.14 – 0.10) = $52.25

Present Value Interest Factors for $1 discounted at i percent