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PROBLEM 1 (12 MARKS) Steers Co., a coal mining firm has outstanding cumulative preferred stock with a par value of $96.00. The shares pay an annual dividend of 6.25%. Analysts are considering two possible scenarios regarding company performance and dividend payout options, based on the company's earnings outlook and market conditions. Scenario 1: There are no changes in market conditions or earning prospects and the company pays all preferred dividends on time. Scenario 2: The company has an opportunity to reinvest earnings into a project that will help grow earnings for the next 4 years. No dividends will be paid for the 4 years. The dividends will resume in year 5 with the payment of all back dividends as well as the current dividend. Subsequent dividends will be paid on time. Which of the two scenarios will result in a higher current value of the stock? Assume a required rate of return of 11%. Show your work. PROBLEM 2 (20 MARKS) Venture Inc. is a new newly listed young firm that is going through an explosive growth phase. The company expects to pay a $2.68 dividend at the end of the year. The dividend will grow at 22% for the next 3 years, and at 14% for the following 2 years, and then stabilizing at a normal growth rate of 4.5% after that. a. If the stock has a required return of 19.5%, what is the current price per share of the stock? Show your work. (10 marks). b. What is the expected market price of the share in one year? Show your work. (6 marks). c. Calculate the expected dividend yield and capital gains yield expected at the end of the first year. Show your work. (4 marks) PROBLEM 3 (6 MARKS) First Industries Incorporated's most recent cash dividend paid is $4.89 per share. The company's dividend is expected to grow at a constant rate of 6.5 percent per year forever and investors require a 14.5 percent rate of return. a. What is the expected price of the share today? Show your work. (3 marks) b. What is the expected price of the share 4 years from today? (3 marks) 1 PROBLEM 4 (9 MARKS) It was anticipated First Industries Incorporated would pay a cash dividend this year, as mentioned in Problem 3. However, the board of directors has approved the suspending of paying of dividends for the next 4 years as the company undertakes major expansion projects and reinvests all the earnings (100 percent retention ratio). The company anticipates it will start paying dividends again in year 5 where shareholders will receive $8.95 per share owned. Management expects that the dividends will grow at a constant rate of 4 percent per year after that forever. Investors would require a 15 percent rate of return. a. What would be the expected price per share today? Show your work. (4 marks) b. Based on your calculation above, do you think First Industries should take on the planned expansion projects or continue as per problem 3, that is, reject the new investment and continue to pay the dividends that will grow at 6.5 percent forever? Explain your answer. (2 marks) c. What is the minimum cash dividend the company would need to pay per share in year 5 if it is to maintain its current market price and continue with the expansion plan? Assume current price is $65 per share and constant dividend growth rate will still be at 4 percent. Show your work. (3 marks) PROBLEM (32 MARKS) Use the below information from Bakers Inc.'s year-end financial statements to answer the following questions. Bakers Inc's applicable tax rate is 34%. Sales Depreciation Cost of Goods Sold Other Expenses Interest Cash Accounts Receivable Short-term Notes Long-term Debt Net Fixed Assets Accounts Payable Inventory Dividends Paid 2020 2021 23,146,000 25,872,000 3,322,000 3,472,000 7,958,000 9,414,000 1,892,000 1,648,000 1,552,000 1,852,000 12,134,000 12,932,000 16,068,000 18,854,000 3,422,000 2,294,000 40,640,000 49,392,000 101,776,000 108,546,000 8,768,000 9,288,000 28,566,000 30,576,000 2,822,000 3,236,000 a. Draw up the statements of financial position and the statements of comprehensive income for Bakers Inc. for 2020 and 2021. You can use Excel. (20 marks) b. For 2021, calculate the cash flow from assets, cash flow to creditors, and cash flow to shareholders. (12 marks)

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