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Stocks and Their Valuation Problems

Stocks and Their Valuation Problems.

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Stocks and Their Valuation Problems

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  1. Stocks and Their Valuation Problems • 11. Stock Values MegaCapital, Inc., just paid a dividend of $2.00 per share on its stock. The dividends are expected to grow at a constant 6 percent per year indefinitely. If investors require a 13 percent return on MegaCapital stock, what is the current price? What will the price be in 3 years? • Answer: P0=$30.29 • P3=$36.07

  2. Stocks and Their Valuation Problems • 12. Stock Values SAF, Inc.’s next dividend payment will be $3.00 • per share. The dividends are anticipated to maintain a 5 percent • growth rate forever. If SAF stock currently sells for $70.50 per • share, what is the required return? • Answer: 9.26%

  3. Stocks and Their Valuation Problems • 17. Stock Valuation Jordan’s Jalopies pays a constant $5.00 • dividend on its stock. The company will maintain this dividend for • the next 7 years, and then cease paying any more dividends • forever. If the required return on this stock is 12 percent, what is • the current share price? • Answer: $22.82

  4. Stocks and Their Valuation Problems • 30. Nonconstant Growth Harry’s Hat Shop is a young start-up • company. No dividends will be paid on the stock over the next five • years, because the firm needs to plow back its earnings to fuel • growth. The company will then begin paying a $2.00 per share • dividend, and will increase the dividend by 7 percent per year • thereafter. If the required return on this stock is 14 percent, what • is the current share price? • Answer: $14.84

  5. Stocks and Their Valuation Problems • 34. Supernormal Growth PerfectSoft Corp. is experiencing rapid • growth. Dividends are expected to grow at 30 percent per year • during the next three years, 20 percent over the following year, • and then 6 percent per year indefinitely. The required return on • this stock is 15 percent, and the stock currently sells for $42.50 per • share. What is the projected dividend for the coming year? • Answer: $2.39

  6. Stocks and Their Valuation Problems • 35. Negative Growth Ancient Items Co. is a mature • manufacturing firm. The company just paid a $4.00 dividend, but • management expects to reduce this payout by 6 percent per year • indefinitely. If you require a 15 percent return on this stock, what • will you pay for a share today? • Answer: $17.90

  7. Stocks and Their Valuation Problems • 45. Nonconstant Growth Kardassian Ice Cream Co. just paid a • dividend of $6.75 per share. The company will increase its dividend • by 25 percent next year, and then will reduce this dividend growth • rate by 5 percent a year until it reaches the industry average of 5 • percent, after which the company will keep a constant growth rate • forever. If the required return on Kardassian stock is 13.75 • percent, what will a share of stock sell for today? • Answer: $122.61

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