CHAPTER 8

Stocks & Their Valuation Problem solving

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Problem 1

ABC Co. Has just paid cash dividend of $2 per share Investors require a 16% return from investments such as this If the dividend is expected to grow at a steady 8% per year, what is the current value of the stock? What will the stock value be worth in 5 years?
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Problem 2

In problem 1, what would the stock sell for today if the dividend was expected to grow at 20% per year for the next 3 years and then settle down to 8% per year, indefinitely?

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Problem 3

JBH Inc. is expected to pay dividends of $2, $3, and $5 for the next three years Thereafter, the dividends are expected to grow at a constant rate of 8% If the required return is 16%, what will be the current stock price? What will be the stock price next year and at the end of three years?
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Problem 4

You forecast that ITT will pay a dividend of $2.40 next year and that dividends will grow at a rate of 9% a year What price would you expect to see for ITT stock if the market capitalization rate is 15%

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Problem 5

If the price of ITT is $30, what market capitalization rate is implied by your forecasts of problem 4?

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Problem 6

ABCs stock is currently trading at $25 per share The stocks dividend is projected to increase at a constant rate of 7% per year The required rate of return on the stock is 10% What is the expected price of the stock 4 years from today?
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Problem 7

ABC is expected to pay a $2.00 per share dividend at the end of the year (D1 = 2.00) The stocks sells for $40 per share Required rate of return is 11% The dividend is expected to grow at a constant rate, g, forever What is the growth rate, g, for this stock?

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Problem 8

You are given the following data:

The risk-free rate is 5% The required return on the market is 8% The expected growth rate for the firm is 4% The last dividend paid was 0.80 per share Beta is 1.3

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Problem 8 - continuing

Now assume the following changes occur:

The inflation premium drops by 1 percent An increased degree of risk aversion causes the required return on the market to go to 10% after adjusting for the changed inflation premium The expected growth rate increases to 6% Beta rises to 1.5
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Problem 8 - continuing

What will be the change in price per share, assuming the stock was in equilibrium before the change?

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Problem 9

ABCs stock is currently selling at an equilibrium price of $30 per share The firm has a 6% growth rate Last years earnings per share, E0 were $4.00 Dividend payout ratio is 40% The risk-free rate is 8% Market risk premium is 5% If market risk (beta) increases by 50%, and all other factors remain constant, what will be the new stock price? (use 4 decimal places in calculations) 7-12

Problem 10

A stock, which currently does not pay a dividend, is expected to pay its first dividend if $1.00 per share in five years (D5 = $1.00) After the dividend is established, it is expected to grow at an annual rate of 25% per year for the following three years (D8 = $1.9531) and then grow at a constant rate of 5% per year Assume that the risk-free rate is 5.5%, the market risk premium is 4% and that the stocks beta is 1.2 What is the expected price of the stock today?
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Problem 11

You have been given the following projections for ABC corporation for the coming year
Sales = 10,000 units Sales price per unit = $10 Variable cost per unit = $5 Fixed costs = $10,000 Bonds outstanding = $15,000 rd on outstanding bonds = 8% Tax rate = 40% Shares of common stock outstanding = 10,000 shares Beta = 1.4 rRF = 5% rM = 9% Dividend payout ratio (d) = 60% 7-14

Find the current price per share for ABC corporation

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