HW 8.b

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 dividend of $10 per share 10 years from today and will increase the dividend by 5 percent per year thereafter. If the required return on this stock is 11.5 percent, what is the current share price?

P9= D10/ (R− g) = $10 / (0.115 − 0.05) = $153.85 P0 = $153.85 / (1.115)^9 P0 = $57.76

The next dividend payment by Savitz, Inc., will be $2.00 per share. The dividends are anticipated to maintain a growth rate of 6 percent forever. If the stock currently sells for $40 per share, what is the required return?

R = ( D 1 / P 0 ) + g R = ($2.00 / $40) + .06 R = 0.1100 = 11.00%

Bedeker, Inc., has an issue of preferred stock outstanding that pays a $4.55 dividend every year in perpetuity. If this issue currently sells for $96 per share, what is the required return?

R = D/P0 R = $4.55 / $96 R = 0.04739 = 4.74%

The next dividend payment by Savitz, Inc., will be $1.44 per share. The dividends are anticipated to maintain a growth rate of 6 percent forever. The stock currently sells for $26 per share. a. What is the dividend yield? b. What is the expected capital gains yield?

a. Dividend yield = D1 / P0 Dividend yield = $1.44 / $26 Dividend yield = 0.05538 = 5.54% b. Same as the dividend growth rate so Capital gains yield = 6%

The Perfect Rose Co. has earnings of $1.40 per share. The benchmark PE for the company is 15. a. What stock price would you consider appropriate? b. What if the benchmark PE were 18?

a. P = Benchmark PE ratio × EPSP P = $1.40 x 15 = $21.00 b. P = Benchmark PE ratio x EPSP P = $1.40 x 18 = $25.20