Sam Strother and Shawna Tibbs are senior vice presidents of Mutual of Seattle. They are codirectors of the company’s pension fund management division, with Strother having responsibility for fixed income securities (primarily bonds) and Tibbs responsible for equity investments. A major new client, the Northwestern Municipal Alliance, has requested that Mutual of Seattle present an investment seminar to the mayors of the cities in the association, and Strother and Tibbs, who will make the actual presentation, have asked you to help them. To illustrate the common stock valuation process, Strother and Tibbs have asked you to analyze the Temp Force Company, an employment agency that supplies word processor operators and computer programmers to businesses with temporarily heavy workloads. You are to answer the following questions.
a. Describe briefly the legal rights and privileges of common stockholders
b. Assume that Temp Force has the required rate of return on the firm’s stock is 10%?
c. Now assume that Temp Force’s dividend is expected to experience supernormal growth of 30% from Year 0 to Year 1, 20% from Year 1 to Year 2, and 10% from Year 2 to Year 3. After Year 3, dividends will grow at a constant rate of 6%. What is the stock’s intrinsic value under these conditions? What are the expected dividend yield and capital gains yield during the first year?
d. Assume that Temp Force is a constant growth company whose last dividend (D0, which was paid yesterday) was $2.00 and whose dividend is expected to grow indefinitely at a 6% rate.
e. (1) What is the firm’s expected dividend stream over the next 3 years? (2) What is the firm’s current intrinsic stock price? (3) What is the stock’s expected value 1 year from now? (4) What are the expected dividend yield, the expected capital gains yield, and the expected total return during the first year?