Question

Assignment Stock Valuation 1. (Common stock valuation) Wayne, Inc.'s outstanding common stock is currently selling in the market for $33. Dividends of S2 30per share were paid last year, return on equity is 20 percent, and its retention rate is 25 percent. a. What is the value of the stock to you, given a 15percent requiredrate of rectum? b. Should you purchase this stock? 2. (Measuring growth) Thomas, Inc.'s return on equity is 13 percent and management has plans to retain 20 percent of earnings for investment in the company a. What will be thecompany's growth rate? b. How would the growth rate change if management (1) increased retained earnings to 35percent or (ii) decreased retention to 13 percent? 3.(Measuring growth) Solar Power Systems expects to earn $20 per share this year and intends to pay out $8 in dividends to shareholders and retain $12 to invest in new projects with an expected rectum on equity of 20percent in the future, Solar power expects to retain die same dividend payout ratio, expects to earn 20 percent return on its equity invested in new projects, and will not be changing the number of shares of common stock outstanding a. Calculate the future growth rate for Solarpower's earnings b. If the investor's required rate of return for Solarpower's stock is 15 percent, what would be the price of Solarpower's common stock? 4. Changing Stock Price Year by Year The price of a stock can vary from year to year. Using the dividend model and the following information, calculate the dividend price each year and then graph the changing price of the stock. Current dividend is $2.30, dividend growth rate is 14.09, and required return is: Retur Year Be Year Retro Year Reus Year Retur 11 04 1.55 TO

Answer 1

1-
growth rate	retention ratio*return on equity	25%*20%	5.00%
expected dividend	last year dividend*(1+growth rate)	2.30*(1.05)	2.415
value of stock	expected dividend/(required rate of return-growth rate)	2.415/(15%-5%)	24.15
I would not purchase the stock as it is overvalued because its intrisic value is 24.15 while it is trading at a price of 33
2-
growth rate	retention ratio*return on equity	20%*13%	2.6%
growth rate	retention ratio*return on equity	35%*13%	4.55%
growth rate	retention ratio*return on equity	13%*13%	1.69%
3-
future growth rate	retention ratio*return on equity	(12/20)*20%)	12.00%
value of stock	expected dividend/(required rate of return-growth rate)	8/(15%-12%)	266.67
expected dividend		8