You Have Been Given the Following Information on AD Corporation,and

Essay

You have been given the following information on AD Corporation,and you expect this information to hold for the next five years: ROA = 20%; debt/equity ratio = 0.5; interest rate on debt = 10%; dividend payout ratio = 20%.After five years have passed,you expect AD's growth rate to be 10%.The annualized six-month T-bill rate is 7%,current EPS is $4.00,and the stock's beta is 1.25.Assume a market rate of return of 15%.
a. Using the dividend-discount model, estimate the intrinsic value of the stock.
b. The company's CFO is considering increasing his payout ratio to 40% for the first five years. Advise him by estimating the value of the stock with the new payout ratio.
c. The CFO is also considering increasing the debt/equity ratio to one. Estimate the value of the stock with the new ratio.