Turbo Technology Computers is experiencing a period of rapid growth.

To answer your questions, we will perform a series of calculations based on the provided data for Turbo Technology Computers, Kassidy's Kabob House, and McCaffrey's Inc.

Part 1: Turbo Technology Computers

Step 1: Calculate the value of the stock today (P0)

The stock price today (P0) can be calculated using the dividend discount model (DDM) for varying growth rates. The formula for the price of a stock with multiple growth phases is: $ P_0 = \frac{D_1}{(1 + r)} + \frac{D_2}{(1 + r)^2} + \frac{D_3}{(1 + r)^3} + \frac{P_3}{(1 + r)^3} $ Where:

• D1D_1, D2D_2, and D3D_3 are the dividends for Years 1, 2, and 3.
• P3P_3 is the price at the end of Year 3, which can be calculated using the constant growth model from Year 4 onward.
• rr is the required rate of return (12% or 0.12).

Dividends Calculation:

• Last dividend ( $D_0$) = $1.15
• Growth rates:
  • Years 1-2: 15%
  • Year 3: 13%
  • Year 4 onward: 6%

Calculate the dividends: $ D_1 = D_0 \times (1 + g_1) = 1.15 \times (1 + 0.15) = 1.15 \times 1.15 = 1.3225 $ $ D_2 = D_1 \times (1 + g_1) = 1.3225 \times (1 + 0.15) = 1.3225 \times 1.15 = 1.520875 $ $ D_3 = D_2 \times (1 + g_2) = 1.520875 \times (1 + 0.13) = 1.520875 \times 1.13 = 1.72075 $ Price at Year 3: The price at Year 3 can be calculated using the Gordon Growth Model: $ P_3 = \frac{D_4}{(r - g)} $ Where:

• D4=D3×(1+g3)D_4 = D_3 \times (1 + g_3)
• g=6%g = 6\%

Calculate D4D_4: $ D_4 = D_3 \times (1 + g_3) = 1.72075 \times (1 + 0.06) = 1.72075 \times 1.06 = 1.826185 $ Now calculate P3P_3: $ P_3 = \frac{D_4}{(r - g)} = \frac{1.826185}{(0.12 - 0.06)} = \frac{1.826185}{0.06} = 30.436417 $

Now Substitute Back to Calculate P0P_0:

Now we can substitute everything back into our formula for P0P_0: $ P_0 = \frac{1.3225}{(1 + 0.12)} + \frac{1.520875}{(1 + 0.12)^2} + \frac{1.72075}{(1 + 0.12)^3} + \frac{30.436417}{(1 + 0.12)^3} $ Calculating each term:

• P0≈1.32251.12+1.5208751.2544+1.720751.404928+30.4364171.404928P_0 \approx \frac{1.3225}{1.12} + \frac{1.520875}{1.2544} + \frac{1.72075}{1.404928} + \frac{30.436417}{1.404928}

Calculating values: $ P_0 \approx 1.179464 + 1.214934 + 1.225234 + 21.63432 $ Thus, $ P_0 \approx 25.2539 $

Step 2: Calculate P1andP2.P_1^ and P_2^.

Using the same logic:

• For Year 1:

$ P_1 = P_0(1+r) = P_0(1+0.12) \approx 25.2539 * 1.12 \approx 28.287 $

• For Year 2:

$ P_2 = P_0(1+r)^2 = P_0(1+0.12)^2 \approx P_0 * 1.2544 \approx 25.2539 * 1.2544 \approx 31.686 $

Step 3: Calculate Dividend Yield and Capital Gains Yield

Dividend Yield

For Year 1: $ Dividend Yield_{Y1} = \frac{D_1}{P_0} = \frac{1.3225}{25.2539} \approx 0.0524 \text{ or } 5.24% $ For Year 2: $ Dividend Yield_{Y2} = \frac{D_2}{P_1} = \frac{1.520875}{28.287} \approx 0.0538 \text{ or } 5.38% $ For Year 3: $ Dividend Yield_{Y3} = \frac{D_3}{P_2} = \frac{1.72075}{31.686} \approx 0.0543 \text{ or } 5.43% $

Capital Gains Yield

The capital gains yield is equal to the growth rate of the dividends for each year.

• For Year 1: 15%
• For Year 2: 15%
• For Year 3: 13%

Part 2: Kassidy's Kabob House

Required Rate of Return Calculation

The required rate of return for preferred stock can be calculated using the formula: $ r = \frac{D}{P} $ Where:

• D = $5
• P = $50

Calculating: $ r = \frac{5}{50} = 0.10 \text{ or } 10% $

Part 3: McCaffrey's Inc.

Step 4: Calculate Value of Operations

The value of operations can be calculated using the free cash flow model: $ V = \frac{FCF(1+g)}{WACC - g} $ Where:

• FCF = $100,000
• g=7%g = 7\%
• WACC=11%WACC = 11\%

Calculating: $ V_{operations} = \frac{100,000(1+0.07)}{0.11 - 0.07} = \frac{107,000}{0.04} = $2,675,000 $

Step 5: Total Value Calculation

Total value includes both operating value and non-operating assets: Non-operating assets: $325,000 Total Value Calculation: $ Total,Value = V_{operations} + Non,operating,assets = $2,675,000 + $325,000 = $3,000,000 $

Step 6: Estimated Value of Common Equity

Since there is no preferred stock issued, common equity equals total value minus debts. Debts: $1,000,000 Estimated Value of Common Equity: $ Common,Equity,Value = Total,Value - Long-term,Debt = $3,000,000 - $1,000,000 = $2,000,000 $

Step 7: Estimated Per-Share Stock Price

Calculating per-share price: Number of shares outstanding: 50,000 Per-share price calculation: $ Per,Share,Price = \frac{Common,Equity,Value}{Shares,Outstanding} = \frac{2,000,000}{50,000} = $40 $

Summary of Results

• Turbo Technology Computers:
  • Stock value today (P0): $25.25
  • P₁: $28.29
  • P₂: $31.69
  • Dividend yields: Year 1 - 5.24%, Year 2 - 5.38%, Year 3 - 5.43%
  • Capital gains yields: Year 1 - 15%, Year 2 - 15%, Year 3 - 13%
• Kassidy's Kabob House:
  • Required rate of return: 10%
• McCaffrey's Inc:
  • Value of operations: $2,675,000
  • Total value: $3,000,000
  • Estimated value of common equity: $2,000,000
  • Estimated per-share stock price: $40

Sample Answer