Answers
a. The stock price is computed as shown below:
= $ 10 / 1.121 + $ 12 / 1.122 + $ 13 / 1.123 + $ 14 / 1.124 + 1 / 1.124 [ ( $ 14 x 1.04 ) / (0.12 - 0.04) ]
= $ 152.31 Approximately
Price = ( $ 152.31 + cash - debt ) / shares outstanding
= ( $ 152.31 + 2 - 0 ) / 7
= $ 22.04 Approximately
b. The expected price is computed as follows:
= $ 12 / 1.121 + $ 13 / 1.122 + $ 14 / 1.123 + 1 / 1.123 [ ( $ 14 x 1.04 ) / (0.12 - 0.04) ]
= $ 160.59 Approximately
Price = ( $ 160.59 + cash - debt ) / shares outstanding
= ( $ 160.59 + 2 - 0 ) / 7
= $ 23.23 Approximately
c. Expected return is computed as follows:
= ( $ 23.23 - $ 22.04 ) / $ 22.04
= 5.40% Approximately
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