Goldencat Property Management, a London-based corporation, has 1 million shares of common stocks outstanding. The company’s revenue has historically grew at q = 5% per year and reached 2 million in t = 0. Up until year 0, the company’s stock price has been stabilized around 10 pound per share. The dividend per share in period 0 is D0 = 1. The common stockholder’s required rate of return in period 0 is rcs,0 = 15%,
A. Assume the expected return on the market portfolio is E (rm) = 11% and the risk free rate is rf = 3%. According to CAPM, what is Goldencat’s beta?
B. Goldencat has an existing loan relationship with Libertyville Bank in Brussels, Belgium. At the beginning of year t = 0, the outstanding balance of the loan is 10 million, and it needs to be paid off in equal installments in 20 years. Repayment must be made at the end of each period. The APR on this loan is 5% and interests are compounded annually. What’s the company’s debt payment in period 0?
C. The company’s earning is revenue net of debt repayment. What is the company’s net actual earnings per share in period 0? What is the company’s dividend payout ratio in period 0?
D. The constant dividend growth rate valuation model states that Pt = (Dt?1 ·(1+g)) / rcs ? g where g is the expected dividend growth rate. To the extend that you believe this model is true, what do you think the dividend growth rate g is the market expecting if P0 = 10?
E. At the end of period 0, and at the beginning of period 1, news breaks out that Wolverine property management, a Glasgow-based corporation, has launched a business lawsuit against Goldencat. If Goldencat wins the lawsuit, the firm’s revenue projection and dividend projection remains the same as before. If Goldencat lost the legal battle in period 1, the company’s revenue in period 1 will drop to 750k, and it will grow at a new but a slower rate of q? = 2%.
i. Explain why Goldencat corporation might go bankrupt if it loses the lawsuit.
ii. Due to the lawsuit, the stock price of Goldencat drops from P0 = 10 to P1 = 5. Explain the reasons behind this price drop through the viewpoint of the constant dividend growth rate valuation model. What factors contribute to the price drop?
F. The CFO of Goldencat traveled to Brussels and renegotiated a new debt contract with Libertyville Bank at the beginning of period 1. The goal of such renegotiation is to make sure the Goldencat can remain solvent in the future if it lost the lawsuit. Goldencat was able to take out a new loan 10 million from the Bank, the bulk of which is used to pay off the remaining balance of its existing loan. The amount in excess of the remaining balance were paid to the bank as “pre-payment penalty”. The terms of the new loan is such that Goldencat need to pay an annual installment of 700k each year for 50 years.
i. Compute the implied interest rate on the new 50-year loan.
ii. Compute the amount of “pre-payment penalty” Libertyville Bank has charged Goldencat as a result of loan renegotiation.
iii. Explain why debt negotiation is mutually beneficial to both Goldencat and Libertyville Bank.
G. Jeffery, the CEO of Goldencat, announces that the corporation has issued 1 million shares of preferred stock in at the beginning of period 1 at an IPO price of Pps = 5. The preferred stock has a promised dividend payout of 0.025 pound per share per period (year). Timothy, Jeffery’s rich grandpa from Liverpool, bought all these preferred stocks. Compute Timothy’s required rate of return on the preferred stock. Recall from part (a), the risk free interest rate is 3%. The general public believed that Timothy has granted Jeffery a financial favor. Do you agree? Explain.