FRL 300 Homework 6 (Chapter 8)

4.value: 10.00 points Caan Corporation will pay a $3.02 per share dividend next year. The company pledges to increase its dividend by 5.5 percent per year indefinitely. If you require a return of 10 percent on your investment, how much will you pay for the company's stock today? (Do not round intermediate calculations. Round your answer to 2 decimal places, e.g., 32.16.) A) Stock price $

P0 = D0 ( 1 + g) / [R - g] = D1 / [R - g] A) Stock price = P0 = 3.02 / (.1 - .055) = *67.11*

9.value: 10.00 points Lohn Corporation is expected to pay the following dividends over the next four years: $17, $13, $12, and $7.50. Afterward, the company pledges to maintain a constant 5 percent growth rate in dividends forever. If the required return on the stock is 15 percent, what is the current share price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Current share price $

P0 = D0 (1+g) / [R-g] = D1 / [R-g] P4 = D5 / [R-g] = (7.50x1.05) / [.15-.05] = 7.875/.1 = 78.75 Fv 4 = Stock price + Dividend = 78.75 + 7.50 = 86.25 Fv 3 = dividend = 12 Fv 2 = dividend = 13 Fv 1 = dividend = 17 FV 83.25, I/Y = 15%, N = 4, CPT PV = 49.31 FV 12, I/Y = 15%, N = 3, CPT PV = 7.89 FV 13, I/Y = 15%, N = 2, CPT PV = 9.83 FV 17, I/Y = 15%, N = 1, CPT PV = 14.78 sum = current share price= *$81.81*

7.value: 10.00 points Moraine, Inc., has an issue of preferred stock outstanding that pays a $3.15 dividend every year in perpetuity. If this issue currently sells for $92 per share, what is the required return? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Required return %

3.15/92 = *3.42%*

10.value: 10.00 points Synovec Co. is growing quickly. Dividends are expected to grow at a rate of 25 percent for the next three years, with the growth rate falling off to a constant 4 percent thereafter. If the required return is 10 percent, and the company just paid a dividend of $2.95, what is the current share price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Current share price $

D0 = 2.95 D1 = 2.95 x 1.25 = 3.69 D2 = 3.69 x 1.25 = 4.61 D3 = 4.61 x 1.25 = 5.76 P3 = D3 (1+g) / [R-g] = 5.76 x (1.04) / [.1-.04] = 5.99 / .06 = 99.83 Fv 3 = Stock price + Dividend = 99.83 + 5.76 = 105.59 Fv 2 = dividend = 4.61 Fv 1 = dividend = 3.69 N = 3, I/Y = 10%, FV = 105.59, CPT PV = 79.33 N = 2, I/Y = 10%, FV = 4.61, CPT PV = 3.81 N = 1, I/Y = 10%, FV = 3.69, CPT PV = 3.35 sum = current share price = *$86.49*

1.value: 10.00 points The Jackson-Timberlake Wardrobe Co. just paid a dividend of $1.30 per share on its stock. The dividends are expected to grow at a constant rate of 4 percent per year indefinitely. Investors require a return of 14 percent on the company's stock. What is the current stock price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) A) Current price $ What will the stock price be in three years? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) B) Stock price $ What will the stock price be in 12 years? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) C) Stock price $ HintsReferenceseBook & Resources Hint #1

A) P1 = D(1+g) / [R-g] PV = 1.30 x (1.04) / [.14 - 4] = *13.52* B) PV = 13.52 I / Y = 4 N = 3 CPT, *FV = 15.21* C) N = 12 CPT, *FV = 21.65*

5.value: 10.00 points Tell Me Why Co. is expected to maintain a constant 4 percent growth rate in its dividends indefinitely. If the company has a dividend yield of 5.8 percent, what is the required return on the company's stock? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Required return %

Dividend yield = D1 / P0 = 0.058 R = D1 / P0 + g = 0.058 + 0.04 = *9.8%*

6.value: 10.00 points Suppose you know that a company's stock currently sells for $64 per share and the required return on the stock is 14 percent. You also know that the total return on the stock is evenly divided between a capital gains yield and a dividend yield. If it's the company's policy to always maintain a constant growth rate in its dividends, what is the current dividend per share? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Current dividend per share $

Dividend yield % is a % of the total stock per share price P0 = D0 (1+g) / [R-g] = D1 / [R-g] 14% = Capital gains yield + dividend yield = 7% + 7% g = 0.07 7% =D1 = 0.07x64= 4.48 P0 = 64 Dividend yield = D1 = D0 (1+g) = 4.48=D0(1.07) D0 = 4.48/1.07 D0 = *4.19*

8.value: 10.00 points Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on the stock over the next nine years because the firm needs to plow back its earnings to fuel growth. The company will pay a $14 per share dividend 10 years from today and will increase the dividend by 8 percent per year thereafter. If the required return on this stock is 14 percent, what is the current share price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

P0 = D0 (1+g) / [R-g] = D1 / [R-g] P9 = D10 / [R-g] = 14 / [.14-.08] = 14 / 0.06 = 233.33 FV = 233.33 I = 14 N = 9 CPT, PV = *$71.75*

3.value: 10.00 points The next dividend payment by Halestorm, Inc., will be $1.56 per share. The dividends are anticipated to maintain a growth rate of 4 percent forever. The stock currently sells for $29 per share. What is the dividend yield? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) A) Dividend yield % What is the expected capital gains yield? (Enter your answer as a percent.) B) Capital gains yield %

R = D1 / P0 + g Required return = (Dividends / Selling Price Now) + (Growth rate or Capital gains yield) A) Dividend yield = D1 / P0 = Div per share / Current price per share = 1.56 / 29 = *5.38%* B) Capital gains yield = g = *4%*

2.value: 10.00 points The next dividend payment by Halestorm, Inc., will be $1.72 per share. The dividends are anticipated to maintain a growth rate of 4 percent forever. If the stock currently sells for $33 per share, what is the required return? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) A) Required return %

R = [D0 ( 1 + g) / P0] + g R = [D1/P0] + g A) R = 1.72/33 + .04 = 0.0921 = *9.21%*