Transcript Tentative Outline

Stocks and Their Valuation Problems
11. Stock Values MegaCapital, Inc., just paid a dividend of
$2.00 per share on its stock. The dividends are expected to
grow at a constant 6 percent per year indefinitely. If investors
require a 13 percent return on MegaCapital stock, what is the
current price? What will the price be in 3 years?
Answer:
P0=$30.29
P3=$36.07
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Stocks and Their Valuation Problems
12. Stock Values SAF, Inc.’s next dividend payment will be $3.00
per share. The dividends are anticipated to maintain a 5 percent
growth rate forever. If SAF stock currently sells for $70.50 per
share, what is the required return?
Answer:9.26%
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Stocks and Their Valuation Problems
17. Stock Valuation Jordan’s Jalopies pays a constant $5.00
dividend on its stock. The company will maintain this dividend for
the next 7 years, and then cease paying any more dividends
forever. If the required return on this stock is 12 percent, what is
the current share price?
Answer:$22.82
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Stocks and Their Valuation Problems
30. Nonconstant Growth Harry’s Hat Shop is a young start-up
company. No dividends will be paid on the stock over the next five
years, because the firm needs to plow back its earnings to fuel
growth. The company will then begin paying a $2.00 per share
dividend, and will increase the dividend by 7 percent per year
thereafter. If the required return on this stock is 14 percent, what
is the current share price?
Answer:$14.84
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Stocks and Their Valuation Problems
34. Supernormal Growth PerfectSoft Corp. is experiencing rapid
growth. Dividends are expected to grow at 30 percent per year
during the next three years, 20 percent over the following year,
and then 6 percent per year indefinitely. The required return on
this stock is 15 percent, and the stock currently sells for $42.50 per
share. What is the projected dividend for the coming year?
Answer:$2.39
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Stocks and Their Valuation Problems
35. Negative Growth Ancient Items Co. is a mature
manufacturing firm. The company just paid a $4.00 dividend, but
management expects to reduce this payout by 6 percent per year
indefinitely. If you require a 15 percent return on this stock, what
will you pay for a share today?
Answer:$17.90
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Stocks and Their Valuation Problems
45. Nonconstant Growth Kardassian Ice Cream Co. just paid a
dividend of $6.75 per share. The company will increase its dividend
by 25 percent next year, and then will reduce this dividend growth
rate by 5 percent a year until it reaches the industry average of 5
percent, after which the company will keep a constant growth rate
forever. If the required return on Kardassian stock is 13.75
percent, what will a share of stock sell for today?
Answer:$122.61
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