BWFF 2023/A102-Stock/suryati.az
Exercise on Stock Valuation
1. Little Feet Shoe Co. just paid a dividend of 2.45 on its common stock. This company's dividends are
expected to grow at a constant rate of 5% indefinitely. If the required rate of return on this stock is
12%, compute the current value of per share of LFS stock.
Answer : $36.75
2. Fris B. Corporation stock is currently selling for $24.66. It is expected to pay a dividend of $2.50 at
the end of the year. Dividends are expected to grow at a constant rate of 5% indefinitely. Compute
the required rate of return on FBC stock.
Answer : 15.14%
3. You are evaluating the purchase of Cool Toys, Inc. common stock that just paid a dividend of $2.88.
You expect the dividend to grow at a rate of 4%, indefinitely. You estimate that a required rate of
return of 9% will be adequate compensation for this investment. Assuming that your analysis is
correct, what is the most that you would be willing to pay for the common stock if you were to
purchase it today?
Answer : $59.90
4. A stock currently sells for $63 per share, and the required return on the stock is 10%. Assuming a
growth rate of 5%, calculate the stock's last dividend paid.
Answer : 3
5. White Sink, Inc. just paid a dividend of $5.55 per share on its common stock, and the firm is
expected to generate constant growth of 12.25% over the foreseeable future. The common stock is
currently selling for $73.75 per share. The firm's dividend payout ratio is 40%, and White's marginal
tax rate is 40%. What is the rate of return that common stockholders expect?
Answer : 20.7%
6. You are considering the purchase of Miller Manufacturing, Inc.'s common stock. The stock is selling
for $25.00 per share. The next dividend is expected to be $2.35, and you expect the dividend to
keep growing at a constant rate. If the stock is returning 18%, calculate the growth rate of dividends.
Answer : 8.6%
7. Is the following common stock priced correctly? If no, what is the correct price?
Price
= $26.25
Required rate of return = 13%
Dividend year 0
= $2.00
Dividend year 1
= $2.10
Answer : Yes
BWFF 2023/A102-Stock/suryati.az
8. Green Corp.'s preferred stock is selling for $20.83. If the company pays $2.50 annual dividends, what
is the expected rate of return on its stock?
Answer : 12%
9. Murky Pharmaceuticals has issued preferred stock with a par value of $100 and a 5% dividend. The
investors' required yield is 10%. What is the value of a share of Murky preferred?
Answer : $50
10. Miller/Hershey's preferred stock is selling at $54 on the market and pays an annual dividend of
$4.20 per share.
a) What is the expected rate of return on the stock?
b) If an investor's required rate of return is 9%, what is the value of the stock for that investor?
c) Considering the investor's required rate of return, does this stock seem to be a desirable
investment?
Answer:
a. 7.78%
b. $46.66
c. No.
11. GG Ltd estimated that the dividend will grow at 3% for the first year and 2% for the second year.
After that the dividend is expected to grow at 5% indefinitely. The company currently pays a
dividend of RM2 per share. Shareholders required rate of return is 14%. Calculate the value of the
stock.
Answer: $22.09