Constant Growth Valuation

1. Woidtke Manufacturing's stock currently sells for $29 a share. The stock just paid a dividend of $1.25
a share (i.e., D0 = $1.25), and the dividend is expected to grow forever at a constant rate of 5% a year.
What stock price is expected 1 year from now? Round your answer to the nearest cent.
$
𝑃1 = $29 ∗ 1.05 = $𝟑𝟎. 𝟒𝟓

What is the estimated required rate of return on Woidtke's stock? Round the answer to three decimal
places.
% the first part is right just need this answer
𝐷1 $1.25 ∗ 1.05
𝑟= +𝑔 = + 5% = 𝟗. 𝟓𝟐𝟔%
𝑃0 $29.00

2. Nonconstant Growth Valuation

A company currently pays a dividend of $2 per share (D0 = $2). It is estimated that the company's
dividend will grow at a rate of 25% per year for the next 2 years, then at a constant rate of 5%
thereafter. The company's stock has a beta of 0.9, the risk-free rate is 6.5%, and the market risk
premium is 6%. What is your estimate of the stock's current price? Round your answer to the nearest
cent.
𝑟𝑒 = 𝑟𝑓 + 𝛽 ∗ 𝑀𝑅𝑃 = 6.5% + 0.9 ∗ 6% = 11.9%

$2.00 ∗ 1.25 $2.00 ∗ 1.252 $2.00 ∗ 1.252 ∗ 1.05⁄(0.119 − 0.05)

𝑃= + + = $𝟒𝟐. 𝟕𝟏
1.1191 1.1192 1.1192

3. EMC Corporation has never paid a dividend. Its current free cash flow of $400,000 is expected to grow
at a constant rate of 4%. The weighted average cost of capital is WACC = 10%. Calculate EMC's
estimated value of operations. Round your answer to the nearest dollar. $

$400,000 ∗ 1.04
𝑉= = $𝟔, 𝟗𝟑𝟑, 𝟑𝟑𝟑
0.10 − 0.04

4. Horizon Value
Current and projected free cash flows for Radell Global Operations are shown below.
Actual
2013
2014 Projected
2015
2016
Free cash flow $602.44 $663.12 $703.17 $745.36
(millions of dollars)
Growth is expected to be constant after 2015, and the weighted average cost of capital is 10.8%. What is
the horizon (continuing) value at 2016 if growth from 2015 remains constant? Round your answer to the
nearest dollar. Round intermediate calculations to two decimal places.$

$745.36
𝑔= − 1 = 6%
$703.17

$745.36 ∗ 1.06
𝑉= = $𝟏𝟔, 𝟒𝟔𝟎
0.108 − 0.06

5. Constant Growth Rate, g

A stock is trading at $45 per share. The stock is expected to have a year-end dividend of $3 per share (D1
= $3), and it is expected to grow at some constant rate g throughout time. The stock's required rate of
return is 16% (assume the market is in equilibrium with the required return equal to the expected
return). What is your forecast of g? Round the answer to three decimal places.%

𝐷1
𝑃=
𝑟−𝑔

𝐷1 $3
𝑔=𝑟− = 16% − = 𝟗. 𝟑𝟑𝟑%
𝑃 $45