9 terms

CH. 7 Stock Valuation

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Michael's, Inc. just paid $2.15 to its shareholders as the annual dividend. Simultaneously, the company announced that future dividends will be increasing by 4.70 percent. If you require a rate of return of 8.9 percent, how much are you willing to pay today to purchase one share of Michael's stock?
P0 = [$2.15 × (1 + 0.047)] / (0.089 - 0.047) =

$53.60
Leslie's Unique Clothing Stores offers a common stock that pays an annual dividend of $3.30 a share. The company has promised to maintain a constant dividend. How much are you willing to pay for one share of this stock if you want to earn a 12.80 percent return on your equity investments?
P = $3.30 / 0.1280 =

$25.78
The common stock of Eddie's Engines, Inc. sells for $36.83 a share. The stock is expected to pay $2.80 per share next year. Eddie's has established a pattern of increasing their dividends by 4.9 percent annually and expects to continue doing so. What is the market rate of return on this stock?
r = $2.80 / $36.83 + 0.049 =

12.50 percent
Shares of common stock of the Samson Co. offer an expected total return of 21.0 percent. The dividend is increasing at a constant 5.5 percent per year. The dividend yield must be:
Dividend yield = 0.210 - 0.055 =

15.50 percent.
Weisbro and Sons common stock sells for $41 a share and pays an annual dividend that increases by 5.6 percent annually. The market rate of return on this stock is 9.60 percent. What is the amount of the last dividend paid by Weisbro and Sons?
P0 = $41 = [D0 × (1 + 0.056)] / (0.0960 - 0.056);

D0 = $1.55
The Bell Weather Co. is a new firm in a rapidly growing industry. The company is planning on increasing its annual dividend by 19 percent a year for the next 4 years and then decreasing the growth rate to 4 percent per year. The company just paid its annual dividend in the amount of $1.90 per share. What is the current value of one share of this stock if the required rate of return is 7.40 percent?
P4 = ($1.90 × 1.194 × 1.04) / (0.074 - 0.04) = $116.54560

P0 = ($1.90 × 1.19) / 1.074 + ($1.90 × 1.192) / 1.0742 + ($1.90 × 1.193) / 1.0743 + ($1.90 × 1.194) / 1.0744 + $116.54560 / 1.0744 =

$97.48
NU YU announced today that it will begin paying annual dividends. The first dividend will be paid next year in the amount of $0.29 a share. The following dividends will be $0.34, $0.49, and $0.79 a share annually for the following three years, respectively. After that, dividends are projected to increase by 2.4 percent per year. How much are you willing to pay today to buy one share of this stock if your desired rate of return is 11 percent?
P4 = ($0.79 × 1.024) / (0.11 - 0.024) = $9.40651

P0 = $0.29 / 1.11 + $0.34 / 1.112 + $0.49 / 1.113 + $0.79/ 1.114 + $9.40651 / 1.114 =

$7.61
The Red Bud Co. pays a constant dividend of $3.10 a share. The company announced today that it will continue to do this for another 2 years after which time they will discontinue paying dividends permanently. What is one share of this stock worth today if the required rate of return is 8.7 percent?
P0 = $3.10 / 1.087 + $3.10 / 1.0872 =

$5.48
Railway Cabooses just paid its annual dividend of $2.50 per share. The company has been reducing the dividends by 11.7 percent each year. How much are you willing to pay today to purchase stock in this company if your required rate of return is 13 percent?
P0 = [$2.50 × [1 + (- 0.117)]] / [0.13 - (- 0.117)] =

$8.94
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