Chapter 9 lecture
9-10 Martell Mining Company's ore reserves are being depleted, so its sales are falling. Also, because its pit is getting deeper each year, its costs are rising. As a result, the company's earnings and dividends are declining at the constant rate of 5% per year. If D0 = $5 and rs = 15%, what is the value of Martell Mining's stock?
D1/rs-g D0(1+g)/rs-g $5[1+(.05)]/.15-(-.05) = 4.75/.20= $23.75
9-11 A stock is expected to pay a dividend of $0.50 at the end of the year (that is, D1 = 0.50), and it should continue to grow at a constant rate of 7% a year. If its required return is 12%, what is the stock's expected price 4 years from today?
D1= .50 g= 7% rs=12% D5/rs-g have d1 so do [(.50)(1.07)^4]/.12-.07= $13.11
9-3 Harrison Clothiers' stock currently sells for $20.00 a share. It just paid a dividend of $1.00 a share (that is, D0 = $1.00). The dividend is expected to grow at a constant rate of 6% a year. What stock price is expected 1 year from now? What is the required rate of return?
P0= 20; D0= $1; g=6% P hat of 1= $20(1.06)= $21.20 r hat of s= 1(1.06)/20 + .06; 1.06/20 +.06 = .113= 11.3%= rs
9-7 What will be the nominal rate of return on a perpetual preferred stock with a $100 par value, a stated dividend of 8% of par, and a current market price of (a) $60, (b) $80, (c) $100, and (d) $140?
a) $8/$60= 13.33% b) 8/80= 10% c) 8/100= 8% d) 8/140= 5.71%
9-4 Hart Enterprises recently paid a dividend, D0, of $1.25. It expects to have nonconstant growth of 20% for 2 years followed by a constant rate of 5% thereafter. The firm's required return is 10%. a. How far away is the horizon date? b. What is the firm's horizon, or continuing, value? c. What is the firm's intrinsic value today, P^ 0 ?
draw a timeline! a) horizon date- period 2 b) HV= dividend 3/rs-g = 1.89/.1-.05 = $37.80 *also p hat 2 c) p hat 0= $34.09 shortcut- CF0- 0 down CF1- 1.50 enter FO1- 1 down CF2-1.80+ 37.80=39.60 enter down NPV enter, I=10% down, compute= 34.09 *use calc shortcut- easier clear everything: second tvm second clear worksheet
9-14 Microtech Corporation is expanding rapidly and currently needs to retain all of its earnings; hence, it does not pay dividends. However, investors expect Microtech to begin paying dividends, beginning with a dividend of $1.00 coming 3 years from today. The dividend should grow rapidly—at a rate of 50% per year—during Years 4 and 5; but after Year 5, growth should be a constant 8% per year. If the required return on Microtech is 15%, what is the value of the stock today?
horizon date- period 5 $19.89 see photo for work
find expected dividend yeild, capital gains yield, and total return during the first year
r hat of s = D1/P0 + g in equilibrium this will be the same so it equals rs= rrf +( rm - rrf)b assume the market is in equilibrium
9-2 Thomas Brothers is expected to pay a $0.50 per share dividend at the end of the year (that is, D1 = $0.50). The dividend is expected to grow at a constant rate of 7% a year. The required rate of return on the stock, rs, is 15%. What is the stock's current value per share?
use constant growth model: D1/rs- g $ .50/$ .15- $ .07= $6.25 dont need to multiply to find year one because we were given year one
9-1 DPS CALCULATION Warr Corporation just paid a dividend of $1.50 a share (that is, D0 = $1.50). The dividend is expected to grow 7% a year for the next 3 years and then at 5% a year thereafter. What is the expected dividend per share for each of the next 5 years?
year 1- 1.606 year 2- 1.7174 3- 1.8376 4- 1.9294 5- 2.0259