Individual Assignment- BWFF2043

Early in 2004, Inez Marcus, the chief financial officer for Suarez Manufacturing, was given the task of
assessing the impact of a proposed risky investment on the firm’s stock value. To perform the necessary
analysis, Inez gathered the following information on the firm’s stock.

During the immediate past 5 years (1999–2003), the annual dividends paid on the firm’s common stock
were as follows: Year Dividend per share

2003 $3.80
2002 3.40
2001 3.1
2000 2.80
1999 2.60

The firm expects that without the proposed investment, the dividend in 2004 will be $4.18 per share and
the historical annual rate of growth (rounded to the nearest whole percent) will continue in the future.
Currently, the required return on the common stock is 28%. Inez’s research indicates that if the proposed
investment is undertaken, the 2004 dividend will rise to $4.30 per share and the annual rate of dividend
growth will increase to 26%.

She feels that in the best case, the dividend would continue to grow at this rate each year into the future
and that in the worst case, the 26% annual rate of growth in dividends would continue only through 2006,
and then, at the beginning of 2007, would return to the rate that was experienced between 1999 and 2003.
As a result of the increased risk associated with the proposed risky investment, the required return on the
common stock is expected to increase by 4% to an annual rate of 28%, regardless of which dividend
growth outcome occurs.

Armed with the preceding information, Inez must now assess the impact of the proposed risky investment
on the market value of Suarez’s stock. To simplify her calculations, she plans to round the historical
growth rate in common stock dividends to the nearest whole percent.

To Do

a. Find the current value per share of Suarez Manufacturing’s common stock.

b. Find the value of Suarez’s common stock in the event that it undertakes the proposed risky investment
and assuming that the dividend growth rate stays at 26% forever. Compare this value to that found in part
(a) what effect would the proposed investment have on the firm’s stockholders? Explain.

c. On the basis of your findings in part b, do the stockholders win or lose as a result of undertaking the
proposed risky investment? Should the firm do it? Why?

d. Rework parts b and c assuming that at the beginning of 2007 the annual dividend growth rate returns to
the rate experienced between 1999 and 2003.
Guidelines:

1- Students will work on the exercise individually.

2- No need to submit in CD but must submit the hard copy as well as upload the file to your
online learning.

3- Deadline: The deadline for submission of the individual assignment is April 24, 2019
(Wednesday).