Assume a firm pays dividends each year and is expected to pay its next dividend of...
Assume a firm pays dividends each year and is expected to pay its next dividend of $6 in 1 year. The price per share is currently at $100. The firm announced previously that it would continue its practice of plowing back 40% of earnings into the firm to ensure an average 5% annual growth in earnings across time. Assume a cost of equity of 11%. How much of the stock price is attributable to the present value of growth opportunities?
Homework Answers
Earnings = Dividend / [1 - Plowback ratio] = $1 / [1 - 0.40] = $1.67
PVGO = Stock Price - [Earnings / Cost of Equity]
= $100 - [$1.67 / 0.11] = $100 - $15.15 = $84.85
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Assume a firm pays dividends each year and is expected to pay
its next dividend of...
Doolittle Co.just paid a dividend of $4.2 this year (to). Doolittle is expected to pay 0.73...
Doolittle Co.just paid a dividend of $4.2 this year (to). Doolittle is expected to pay 0.73 of its earnings as dividends and will have an ROE of 0.1 until the fourth year (ta). After that, its dividend payout ratio will increase to 0.79 and the ROE is expected to decrease to 0.04. Applying the cost of equity of 0.13 and the multistage growth model, compute the intrinsic price of Doolittle. Flanders, Inc., has expected earnings of $7.5 per share for...
Hewlett-Packard’s (HP) expected dividends for the coming year are $0.60 and expected earnings per...
Hewlett-Packard’s (HP) expected dividends for the coming year are $0.60 and expected earnings per share are $0.80. The required rate of return for HP is 15%. HP’s ROE is 18% and plowback ratio is 25%. Using the constant-growth dividend discount method, calculate the firm’s intrinsic value. (10 points) Calculate the present value of growth opportunities for HP. (10 points) Suppose you found a positive PVGO for HP. In this case, should the firm continue with its current dividend policy or...
6. Expected returns, dividends, and growth The constant growth valuation formula has dividends in the numerator. Divide...
6. Expected returns, dividends, and growth The constant growth valuation formula has dividends in the numerator. Dividends are divided by the difference between the required return and dividend growth rate as follows: PO D (rg Which of the following statements is true? Increasing dividends will always decrease the stock price, because the firm is depleting internal funding resources Increasing dividends may not always increase the stock price, because less earnings may be invested back into the firm and that impedes...
No-Growth Industries pays out all of its earnings as dividends. It will pay its next $3...
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New Products pays no dividend at the present time. The firm will pay the first dividend...
New Products pays no dividend at the present time. The firm will pay the first dividend of $0.25 per share at the end of Year 3. After that, the dividend will growth at a rate of 15% per year for two years. The company’s stock can be sold for $38 per share at the end of Year 5. How much should you pay per share to purchase this stock today at a required return of 13.8 percent? (Note: keep four...
Questions 4-6 4. Firm Y currently pays a dividend of $1.22, which is expected to grow...
Questions 4-6
4. Firm Y currently pays a dividend of $1.22, which is expected to grow indefinitely at 5%. If the current value of the firm's shares based on constant-growth DDM is $32.03, what is the required rate of return? 5. MM Corp, has an ROE of 16% and a plowback ratio of 50%. If the coming year's earnings are expected to be s per share, at what price will the stock sell? The market capitalization rate is 12%. 6....
A firm is expected to pay a dividend of $1.00 next year. Dividends are expected to...
A firm is expected to pay a dividend of $1.00 next year. Dividends are expected to grow by 20% the year after that. For the next two years dividends will grow by 15% each year. Thereafter the dividends are only expected to grow by 5% each year. The appropriate required rate of return for this investment is 15%? What is the fair price of the stock today?
Maynard Steel plans to pay a dividend of $3.02 this year. The company has an expected...
Maynard Steel plans to pay a dividend of $3.02 this year. The company has an expected earnings growth rate of 3.5% per year and an equity cost of capital of 10.4%. a. Assuming Maynard's dividend payout rate and expected growth rate remain constant, and that the firm does not issue or repurchase shares, estimate Maynard's share price. b. Suppose Maynard decides to pay a dividend of $1.04 this year and use the remaining $1.98 per share to repurchase shares. If...
Maynard Steel plans to pay a dividend of $3.00 this year. The company has an expected...
Maynard Steel plans to pay a dividend of $3.00 this year. The company has an expected earnings growth rate of 4.0% per year and an equity cost of capital of 10.0%. a. Assuming Maynard's dividend payout rate and expected growth rate remain constant, and that the firm does not issue or repurchase shares, estimate Maynard's share price. b. Suppose Maynard decides to pay a dividend of $1.00 this year and use the remaining $2.00 per share to repurchase shares. If...
8. Firm B is expected to pay a dividend of $2.00 at the end of Year...
8. Firm B is expected to pay a dividend of $2.00 at the end of Year 1 and $3.00 at the end of Year 2. The firm is expected to pay $3.15 (5% greater than the dividend in Year 2) in Year 3, and the company will continue to pay dividends at the 5% growth rate afterward. Compute the expected stock price today, given the required rate of return is r. 8%.
Doolittle Co.just paid a dividend of $4.2 this year (to). Doolittle is expected to pay 0.73 of its earnings as dividends and will have an ROE of 0.1 until the fourth year (ta). After that, its dividend payout ratio will increase to 0.79 and the ROE is expected to decrease to 0.04. Applying the cost of equity of 0.13 and the multistage growth model, compute the intrinsic price of Doolittle. Flanders, Inc., has expected earnings of $7.5 per share for...
6. Expected returns, dividends, and growth The constant growth valuation formula has dividends in the numerator. Dividends are divided by the difference between the required return and dividend growth rate as follows: PO D (rg Which of the following statements is true? Increasing dividends will always decrease the stock price, because the firm is depleting internal funding resources Increasing dividends may not always increase the stock price, because less earnings may be invested back into the firm and that impedes...
Questions 4-6
4. Firm Y currently pays a dividend of $1.22, which is expected to grow indefinitely at 5%. If the current value of the firm's shares based on constant-growth DDM is $32.03, what is the required rate of return? 5. MM Corp, has an ROE of 16% and a plowback ratio of 50%. If the coming year's earnings are expected to be s per share, at what price will the stock sell? The market capitalization rate is 12%. 6....
Maynard Steel plans to pay a dividend of $3.02 this year. The company has an expected earnings growth rate of 3.5% per year and an equity cost of capital of 10.4%. a. Assuming Maynard's dividend payout rate and expected growth rate remain constant, and that the firm does not issue or repurchase shares, estimate Maynard's share price. b. Suppose Maynard decides to pay a dividend of $1.04 this year and use the remaining $1.98 per share to repurchase shares. If...
Maynard Steel plans to pay a dividend of $3.00 this year. The company has an expected earnings growth rate of 4.0% per year and an equity cost of capital of 10.0%. a. Assuming Maynard's dividend payout rate and expected growth rate remain constant, and that the firm does not issue or repurchase shares, estimate Maynard's share price. b. Suppose Maynard decides to pay a dividend of $1.00 this year and use the remaining $2.00 per share to repurchase shares. If...
8. Firm B is expected to pay a dividend of $2.00 at the end of Year 1 and $3.00 at the end of Year 2. The firm is expected to pay $3.15 (5% greater than the dividend in Year 2) in Year 3, and the company will continue to pay dividends at the 5% growth rate afterward. Compute the expected stock price today, given the required rate of return is r. 8%.
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