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Situation: Congratulations! You have been hired by the TAD Group a small privately held corporation with diversified business interests and holdings. You will serve as a Special Advisor to Tim DaSilva (Tim), the CEO. In this role, you will be assisting Tim by providing insights to help address key questions. Tim knows you took a finance class and wants your advice on several questions. Can you help him?

1. Potential stock investment (15 marks)

Tim wants your advice on a potential stock purchase. There is excess capital on the balance sheet and he wants to put it to good use. He is excited because he heard that Ginger Corps stock is trading at $75. He notes that Ginger Corp. just paid out $1.7308M in dividends and repurchased $4.3983M worth of shares. Ginger Corp. has 1.12M shares outstanding. Total payouts are expected to grow at an annual rate of 5%. Tim like the other investors of Misty Industries expects a 12% rate of return on shares. What should Tim do? You recall from your finance class that you should use the Total Payout model to estimate of the stock price today. You can assume that all payouts occur annually and that the next payout will be in exactly one year. Show your work and clearly state your final answer.

(b) Tim thanks you for your advice. But, thinking about it some more, he asks you if he should buy or not buy the stock if the stock were currently trading at $100 instead of $75. What do you advise him? (2 marks)

(c) Tim wonders how things might be different if the payouts mentioned above did not grow by 5% - but instead were flat. Should the stock be purchased? Assume that the price is still $75. (3 marks)

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