Yoshida Co. issued $10,000,000 of corporate bonds with 38-year maturity four years ago. The bonds have a coupon rate of 10.5%, pay interest semiannually, and have a part value of $1,000 per bond. The bonds are currently trading at a price of $955.5 per bond. A 25- year Treasury bond with a 6.7% coupon rate (paid semiannually) and $1,000 par is currently selling for $975.42.
Assume that Yoshida has EPS of $1.8775; 755,000 common stocks outstanding; and recently paid a dividend of $0.65 per share. Additionally, the firm generated a net income of $1,417,500 and has common stockholder’s equity of $6,000,000 (book value). You believe the firm is in a constant state of growth and your required rate of return for investments of this risk level is 18%. The firm’s common stock is currently trading for $45 per share.
1) Would your decision to purchase share of Yoshida’s common stock change if, rather than expecting the firm to experience a constant rate of growth, you expect the following variable growth pattern?
Fast growth of 20% for years 1 through 6
Moderate growth of 17% for years 7 through 10
Stable growth of 13% for years 11 and beyond