Equity Questions Comm 308

1. Rearden Steel is expected to pay a $3.00 dividend next year. Dividends are
expected to grow at 10% for the foreseeable future. If the discount rate for
Rearden stock is 15%, what is the price per share for Rearden stock?

2. Nielsen Motors is expected to pay a $5 dividend next year. This is expected to

grow at 8% until year 8. After this growth is expected to slow to 3% per year for
the foreseeable future. What is the price per share if the discount rate is 12%?

3. Taggart Transcontinental Railroad has 1 million shares outstanding and earnings

of $10M. Assume that earnings are expected to remain constant and that Taggart
pays out all earnings as dividends. If the discount rate for Taggart stock is 10%,
what is the price per share?

4. Now suppose that Taggart has the opportunity to build a new engine. The project
will need $10M so Taggart will not pay a dividend next year. The new engine
will increase Taggart's earnings by $2m per year starting next year. What is P0 ?

5. Ed's Bait Shoppe had earnings this year of $5,000,000. From this it paid out
$3,000,000 in dividends. This payout is representative of its typical dividend
policy. You think Ed’s earnings will grow at 4% annually. The discount rate
applied to its stock is 15%. How much would you be willing to pay for a share if
there are 15 million shares outstanding?
Equity Questions Comm 308

6. Mr. Lestat is thinking of buying shares in D'Lioncourt Industries, a processor of

blood supplies. Estimates of next year's earnings per share are $10.00. Mr. Lestat
believes that D'Lioncourt can maintain this level of earnings. Further, he thinks
that the cash flows per share of an expansion project available to D'Lioncourt are
as follows.

Year Project Cash

Flows

0
1
2
3
4
5 -$30.00
6 7.00
7 7.00
8 7.00
9 7.00
10 7.00
11 7.00
12 7.00
13 7.00
14 7.00
15 7.00

a. If r=10%, how much is Mr. Lestat willing to pay for a share?

b. Mr. Archer agrees with Mr. Lestat that next year's earnings per share will
be $10. Further, he believes that next year's dividend will be $8 per share.
He disagrees with Mr. Lestat about the expansion projects. He does not
have any particular ideas about any expansion, but believes that the
dividend will grow at 3% for the foreseeable future. How much is Mr.
Archer willing to pay for a share? (Recall, r=10%.)

7. Currently Featherstone Industries has earnings per share of $5.00 and 1 million
shares outstanding. It has a policy of paying out all of its earnings as dividends.
H. Rumpole Investors believes that Featherstone is about to take on an investment
opportunity that will cost $10,000,000 next year and generate cash flows of
$2,500,000 per year for 5 years beginning 2 years from now. How much would
Rumpole be willing to pay for Featherstone? (r = 10%)
Equity Questions Comm 308

8. Jensen Company has many profitable investment opportunities and is currently

not paying any dividends. It is expected that Jensen will not pay any dividends
until 11 years from now and that dividend will be $2.50. Dividends after that are
expected to grow at 6% per year for all future years. The discount rate is 12%.
What is the price of a share of Jensen 10 years from now, 1 year from now,
today?
Suppose that next year you see Jensen selling for $21.50 per share. Compare this
to the answer above. What could have caused this?