08 May DOES THIS FACT HAVE ANY EFFECT ON THE APPLIED METHODOLOGIES AND SUBSEQUENTLY ON YOUR RECOMMENDATIONS?
The general manager expects that without the proposed purchase(s), the dividend in the coming year will be $ 2.09 per share and the historical annual rate of growth (rounded to the nearest whole percent) will continue in the future. With the purchase(s), it is expected that the dividend in the coming year will rise to $ 2.15 per share and the annual rate of dividend growth will stand at 13%. Also, because of the higher risk that is associated with the new purchase(s), the required return on the common stock is expected to increase by 2%.
QUESTIONS
a) Evaluate the proposals using the appropriate capital budgeting techniques. Critically discuss the results and the pros and cons of the applied methodologies.
b) Assume that the operating cash flows associated with Press A are characterised as more risky in contrast to those of Press B. Does this fact have any effect on the applied methodologies and subsequently on your recommendations? If yes, how do you propose to handle the issue?
c) Considering that the firm needs to raise capital for the proposed purchase(s), briefly outline the pros and cons of alternative financial instruments and methods that can be used by the firm for the financing of the selected purchase(s). Also, critically discuss the capital structure concept.
d) Based on the valuation of Prints Company common share, estimate the effect that the proposed purchase(s) would have on the firm’s shareholders and explain whether the firm should undertake the investment or not.
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