IntegrativeRisk

and ValuationHamlin Steel Company wishes to determine the value of Craft Foundry, a firm that it is considering acquiring for cash. Hamlin wishes to determine the applicable discount rate to use as an input to the constant-growth valuation model. Craft's stock is not publicly traded. After studying the required returns of firms similar to Craft that are publicly traded, Hamlin believes that an appropriate risk premium on Craft stock is about

7%.

The risk-free rate is currently

5%.

Craft's dividend per share for each of the past 6 years is shown in the following table:

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.a. Given that Craft is expected to pay a dividend of

$3.42

next year, determine the maximum cash price that Hamlin should pay for each share of Craft. (Hint: Round the growth rate to the nearest whole percent.)

b. Describe the effect on the resulting value of Craft from:

(1) A decrease in its dividend growth rate of 2% from that exhibited over the

2017-2022

period.(2) A decrease in its risk premium to

6%.

a. The required return on Craft's stock is

nothing%.

(Round to the nearest whole percentage.)The maximum cash price that Hamlin should pay for each share of Craft is

$nothing.

(Round to the nearest cent.)b. (1) If the dividend growth rate decreases by 2%, the maximum cash price that Hamlin should pay for each share of Craft is

$nothing.

(Round to the nearest cent.)(2) If the risk premium decreases to

6%,

the required return on Craft's stock is

nothing%.

(Round to the nearest whole percentage.)With a

11%

required return, the maximum cash price that Hamlin should pay for each share of Craft is

$nothing.

(Round to the nearest cent.)Price is a function of the current dividend,

expected dividend growth rate

expected risk-free growth rate

expected risk premium growth rate

, and the risk-free rate, and the company-specific

risk premium

risk discount

risk-free rate

. For Craft, the lowering of the dividend growth rate

increased

reduced

future cash flows resulting in

an increase

a reduction

in share price. The decrease in the risk premium reflected

an increase

a reduction

in risk leading to

an increase

a reduction

in share price.(Select the best answers from the drop-down menus.)