1. A stock is expected to pay a year-end dividend of $2.00, i.e., D1 = $2.00. The dividend is expected to decline at a rate of 5% a year forever (g = -5%). If the company’s expected and required rate of return is 15%, which of the following statements is CORRECT?
a. The company’s current stock price is $20.
b. The company’s dividend yield 5 years from now is expected to be 10%.
c. The constant growth model cannot be used because the growth rate is negative.
d. The company’s expected capital gains yield is 5%.
e. The company’s stock price next year is expected to be $9.50.
2. A share of common stock has just paid a dividend of $2.00. If the expected long-run growth rate for this stock is 2.0%, and if investors’ required rate of return is 10.5%, what is the stock’s intrinsic value?
3. E. M. Roussakis Inc.’s stock currently sells for $50 per share. The stock’s dividend is projected to increase at a constant rate of 4% per year. The required rate of return on the stock, rs, is 15.50%. What is Roussakis’ expected price 5 years from now?
4. Carter’s preferred stock pays a dividend of $2.00 per quarter. If the price of the stock is $60.00, what is its nominal (not effective) annual expected rate of return?
5. Schnusenberg Corporation just paid a dividend of $1.25 per share, and that dividend is expected to grow at a constant rate of 7.00% per year in the future. The company’s beta is 1.35, the required return on the market is 10.50%, and the risk-free rate is 4.00%. What is the intrinsic value for Schnusenberg’s stock?
6. Rentz RVs Inc. (RRV) is presently enjoying relatively high growth because of a surge in the demand for recreational vehicles. Management expects earnings and dividends to grow at a rate of 30% for the next 4 years, after which high gas prices will probably reduce the growth rate in earnings and dividends to zero, i.e., g = 0. The company’s last dividend, D0, was $1.25. RRV’s beta is 1.20, the market risk premium is 5.25%, and the risk-free rate is 3.00%. What is the intrinsic value of RRV’s common stock?
7. Using the information on Rentz RVs Inc. from problem 6, what is the dividend yield expected for the next year?
8. The Wei Company’s last paid dividend was $2.75. The dividend growth rate is expected to be constant at 2.50% for 2 years, after which dividends are expected to grow at a rate of 8.00% forever. Wei’s required return (rs) is 12.00%. What is the intrinsic value of Wei’s stock?
9. Using the information on Wei Company from problem 8, what should be the price of Wei’s stock at the end of Year 5
10. You are an analyst studying Beranek Technologies, which was founded 10 years ago. It has been profitable for the last 5 years, but it has needed all of its earnings to support growth and thus has never paid a dividend. Management has indicated that it plans to pay a $0.50 dividend 3 years from today, then to increase it at a relatively rapid rate for 2 years with 50% dividend growth in year 4 and 25% dividend growth in year 5, and then to increase its dividend at a constant growth rate of 6.00% per year thereafter. Assuming a required return of 15.00%, what is your estimate of the intrinsic value of Beranek’s stock?
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