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Fluffy's Cat Farms

Dividend History and Forecast for FCF (Fluffy's Cat Farms)
Provided by: Sal's Dubious Stock Forecasts, Inc. (SDSI)
A Maryland Company

Year 2005 2006 2007 (forecast) 2008 (forecast)
Net Income 10,000 20,000 30,000 40,000
Sales Revenue 100,000 200,000 400,000 500,000
Dividend Payments per share $0.45 $0.55 $0.65 $1.00
ks (cost of equity) .43 .48 .45 .41

1. What is the compound growth rate, g for the firm FCF that should be used in the constant growth model based on the four year period given if Sal's forecasts are accurate?

a. 41.42%
b. 22.09%
c. 49.53%
d. None of these are correct.

2. Given the compound growth rate implicit in the provided forecast, and assuming that the constant growth stock valuation formula is valid, what is a fair stock price for FCF as of the end of 2007?

a. $2.83
b. $2.92
c. $2.50
d. None of these.

3. If FCF has a maximum of 5000 shares outstanding, which of the following statements is most true regarding the rate of dividend payout?

a.Dividend payouts are too large to be sustainable --- the forecast is too high given the earnings per share implicit in the data.
b.The dividend payout forecasts are consistent with current year (2006) results, indicating a reasonable growth projection in income to shareholders.
c.Dividend payouts during the forecast period are too low, they will likely increase in the years to come without hurting the firms investment strategy.
d.None of these is true.

4. If the risk free rate in 2006 is estimated at 5 percent and the market risk premium is estimated as 10 percent, what is the beta of FCF in 2006?

a. 4.30
b. 4.8
c. 1.0
d. Insufficient data to compute solution is given.

Solution Summary

This solution is comprised of a detailed explanation to answer what is the compound growth rate, g for the firm FCF that should be used in the constant growth model based on the four year period given if Sal's forecasts are accurate.

$2.19