Question

#1 Van Buren, Inc., currently pays $2.24 per share in dividends on its common stock. Dividends are expected to grow at 7.00 % per year forever. If you require a 13.00 % rate of return (i.e., the discount rate) on this investment, what value would you place on a share of Van Buren common stock? Assume that the current dividend was just paid. Answer format: Currency: Round to 2 decimal places # 2 Bad Investment Incorporated has "promised" investors to pay a $6.00 per year dividend in perpetuity. If investors want a 21.00 % return on this stock based on the risk, what intrinsic value of the stock today? Answer format: Currency: Round to: 2 decimal places. #3 After finishing your first finance class, you decide to start your own investment plan. Your first stock to purchase is Walgreen's (WAL). You are confident enough to project next year's dividend as $1.00. However, you are unsure of future dividends, so you just assume they will grow at 5.00 % per year going forward each year. If you want a 15.00 % return on your investment, what value do you place on the stock today? Answer format: Currency: Round to: 2 decimal places # 4 An analyst has been following American Dream stock. He projects the following dividends for the next three years: YEAR 1 3 Dividend $2.20 $1.61 $3.18 The analyst notes that American Dream stock has a required return of 10..30%. The analyst projects that dividends will grow at a constant rate of 5.00 % per year after year 3. What is the projected selling price for the stock at the end of year 3? Answer format: Currency: Round to: 2 decimal places #5 An analyst has been following American Dream stock. He projects the following dividends for the next three years: YEAR 2 3 Dividend $1.61 $2.20 $3.18

Answer 1

1. Dividend Paid just now = D0 = $2.24

Growth rate = g = 7%

Dividend next year = D1 = D0(1+g)

Required rate of return = r = 13%

According to Gordon's Growth model,

Price of Stock now = P0 = D1/(r - g) = D0(1+g)/(r - g) = 2.24(1+0.07)/(0.13 - 0.07) = $39.95

2. Dividend Paid each year = D = $6

Rate of Return = r = 21%

Value of the stock today = D/(1+r) + D/(1+r)² + ..... = D/r = 6/0.21 = $28.57

3. Dividend next year = D1 = $1

Growth rate = g = 5%

Required rate of return = r = 15%

According to Gordon's Growth model,

Price of Stock now = P0 = D1/(r - g) = 1/(0.15 - 0.05) = $10

4. Dividend in Year 1 = D1 = $1.61

D2 = $2.20

D3 = $3.18

Growth rate = g = 5%

Required Return = r = 10.30%

Dividend In year 4 = D4 = D3(1+g) = 3.18(1+0.05) = $3.339

According to Gordon's Growth model,

Price of Stock in Year 3 = P3 = D4/(r - g) = 3.339/(0.1030 - 0.05) = $63