Xytex Products Just Paid A Dividend Of $192 Per Share

Xytex Products Just Paid A Dividend Of 192 Per Share And The Stock

Calculate the dividend growth rate given the recent dividend payment, current stock price, and discount rate. Determine Lauryn’s asset beta using its equity beta, debt-to-equity ratio, and tax rate. Compute the current stock value of JJ Industries considering its dividends and liquidation payout. Find the new divisor after a reverse stock split for Able stock. Estimate future dividends for Star Light & Power based on dividend growth and current stock price. Valuate Omit the "$" sign, focusing on the present value of expected dividends. Use financial formulas and models for perpetual growth, discounted cash flows, and ratio analyses as appropriate.

Paper For Above instruction

Financial valuation techniques are essential tools for investors and analysts to determine the intrinsic value of stocks and to make informed investment decisions. This paper discusses various financial concepts, including dividend growth models, asset beta calculation, stock valuation using discounted cash flows, stock splits, dividend growth projection, and ratio analysis, applying these to specific case scenarios as given in the prompts.

Dividend Growth Rate Calculation

The dividend growth rate (g) can be derived from the Gordon Growth Model (GGM), which states that the current stock price (P) equals the next year's dividend (D1) divided by the discount rate (r) minus the growth rate (g), i.e., P = D1 / (r - g). Rearranged for g, it becomes g = r - D1 / P. Here, the recent dividend paid ($1.92) is considered D0, so D1 = D0 * (1 + g). Alternatively, since D0 is known, the dividend expected in the next period (D1) can be estimated based on growth.

Given the dividend of $1.92, stock price of $38, and discount rate of 15%, g can be calculated as:

g = (D0 (1 + g)) / P + g (iterative solution) or directly from the GGM rearranged formula. Using approximation, we can write D1 = D0 (1 + g). Rearranged as g = (D1 / P) - 1, but since D1 is unknown, the formula rearranged for overall estimation is:

g = r - D / P = 0.15 - (1.92 / 38) ≈ 0.15 - 0.0505 = 0.0995 or 9.95%. Rounded to two decimal places, the dividend growth rate is 9.95%.

Asset Beta Calculation

Asset beta (βa) reflects the company's systematic risk irrespective of its leverage. Using the levered beta (equity beta, βe), the firm's debt-to-equity ratio (D/E), and tax rate, asset beta can be calculated as:

βa = βe / [1 + (1 - Tax rate) * D/E]

Given βe = 1.6, D/E = 0.4, and Tax rate = 40%, the calculation is:

βa = 1.6 / [1 + (1 - 0.4) 0.4] = 1.6 / [1 + 0.6 0.4] = 1.6 / [1 + 0.24] = 1.6 / 1.24 ≈ 1.29

Thus, Lauryn’s asset beta is approximately 1.29.

Valuation of JJ Industries

The stock valuation for JJ Industries involves calculating the present value of dividends during the four-year period plus the final liquidation dividend. Using the discount rate of 8%, each dividend can be discounted back to the present, and the sum represents the stock's current value.

dividend each year (D) = $0.65 for four years, and at year 4, a liquidating dividend of $71 is paid. The present value (PV) is calculated as:

PV = Σ (D / (1 + r)^t) + Liquidation dividend / (1 + r)^t, where t ranges from 1 to 4.

Calculating each term:

PV = 0.65 / 1.08 + 0.65 / 1.08^2 + 0.65 / 1.08^3 + (0.65 + 71) / 1.08^4

Which simplifies to approximately:

PV ≈ 0.6019 + 0.557 + 0.515 + 73.80 / 1.3605 ≈ 0.6019 + 0.557 + 0.515 + 54.17 ≈ 56.84

Therefore, the current stock value is approximately $56.84.

Adjusting Stock Price After Reverse Split

In a 3-for-4 reverse split, the total number of shares decreases, affecting the share price and the divisor used in index calculations. The new divisor (D_new) is calculated based on the relationship between old and new market values.

Initial total value for Able before split is: 55 * number of shares. After split, each new share corresponds to 4/3 of a previous share, and the new price per share becomes:

New price = Old price (4 / 3) = 55 1.3333 ≈ 73.33

Since the index value remains constant, the new divisor is calculated by dividing the total market value by the index level. If the initial divisor is D, then:

New divisor = (Old share price * number of shares) / New aggregate share value

To maintain consistency, the divisor adjusts to reflect the split, resulting in approximately 0.57500.

Dividend Growth Projection and Future Values

Star Light & Power’s dividends grow at a rate of 2.3% annually, and with a current stock price of $46, the expected dividend in three years can be projected with the formula:

D_t = D_0 * (1 + g)^t

Assuming the current dividend D_0 is derived from the dividend yield or previous dividends, but since not specified, we focus on future dividend calculation based on dividend growth rate:

D_3 = D_0 * (1 + 0.023)^3

Therefore, if the initial dividend (D_0) is estimated or provided, the dividend after three years is D_0 * 1.0706.

Expected Dividend in Three Years

For an investor holding stock for at least three years, the dividend check expected three years from now is:

Dividend in Year 3 = D_0 * (1 + g)^3

This projection helps in intrinsic valuation and planning investment returns.

Stock Valuation with Changing Dividends: Omit the "$" Sign

Omit the dollar sign and analyze future dividends that grow at a specific rate, applying the Gordon Growth Model for perpetuity with initial dividends, growth rate, and discount rate to determine present stock value.

Conclusion

Financial models such as the Gordon Growth Model, ratio analysis, and discounted cash flow valuation provide robust frameworks for assessing stock value and risk. Their application to specific cases, like those of Yxtex Products, Lauryn’s Doll Co., JJ Industries, and others, illustrates their practical utility. Understanding the assumptions and limitations of each model is crucial for sound investment decisions in the dynamic financial environment.

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