FUNDAMENTAL OF FINANCIAL MANAGEMENT
January
1, 2015
TUTORIAL: STOCKS
1. Textbook Chapter 7: 5, 12, 13, 14, 15, 17, 20, 23, 24,28, 31,33,
2. The Jackson–Timberlake Wardrobe Co. just paid a dividend of $1.95 per share on
its stock. The dividends are expected to grow at a constant rate of 6 percent per
year indefinitely. If investors require an 11 percent return on The Jackson–
Timberlake Wardrobe Co. stock, what is the current price? What will the price be in
three years? In 15 years?
3. The next dividend payment by Hot Wings, Inc., will be $2.10 per share. The
dividends are anticipated to maintain a 5 percent growth rate forever. If the stock
currently sells for $48 per share, what is the required return?
4. Teder Corporation stock currently sells for $64 per share. The market requires a 10
percent return on the firm’s stock. If the company maintains a constant 4.5 percent
growth rate in dividends, what was the most recent dividend per share paid D0 on
the stock?
5. Consider the following three stocks:
a) Stock A is expected to provide a dividend of $10 a share forever.
b) Stock B is expected to pay a dividend of $5 next year. Thereafter, dividend
growth is expected to be 4% a year forever.
c) Stock C is expected to pay a dividend of $5 next year. Thereafter, dividend
growth is expected to be 20% a year for five years (i.e., until year 6) and zero
thereafter.
If the required rate of return for each stock is 10%, which stock is the most valuable?
What if the required rate of return is 7%?
???
6. Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on
the stock over the next nine years because the firm needs to plow back its earnings
to fuel growth. The company will pay a $10 per share dividend in 10 years and will
increase the dividend by 5 percent per year thereafter. If the required return on this
stock is 14 percent, what is the current share price?
???
7. Far Side Corporation is expected to pay the following dividends over the next four
years: $11, $8, $5, and $2. Afterward, the company pledges to maintain a constant 5
percent growth rate in dividends forever. If the required return on the stock is 12
percent, what is the current share price?
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FUNDAMENTAL OF FINANCIAL MANAGEMENT
January
1, 2015
8. Chartreuse County Choppers Inc. is experiencing rapid growth. The company
expects dividends to grow at 25 percent per year for the next 11 years before
leveling off at 6 percent into perpetuity. The required return on the company’s stock
is 12 percent. If the dividend per share just paid was $1.74, what is the stock price?
9. Storico Co. just paid a dividend of $2.45 per share. The company will increase its
dividend by 20 percent next year and will then reduce its dividend growth rate by 5
percentage points per year until it reaches the industry average of 5 percent
dividend growth, after which the company will keep a constant growth rate forever. If
the required return on Storico stock is 11 percent, what will a share of stock sell for
today? Here we have a stock with supernormal growth, but the dividend growth changes
every year for the firstfour years. We can find the price of the stock in Year 3 since the
dividend growth rate is constant after thethird dividend. The price of the stock in Year 3 will be
the dividend in Year 4, divided by the requiredreturn minus the constant dividend growth rate.
So, the price in Year 3 will be:
P3= $2.45(1.20)(1.15)(1.10)(1.05) / (.11 – .05) = $65.08
The price of the stock today will be the PV of the first three dividends, plus the PV of the
stock price inYear 3, so:
P0= $2.45(1.20)/(1.11) + $2.45(1.20)(1.15)/1.112+ $2.45(1.20)(1.15)(1.10)/1.113+
$65.08/1.113P0=$55.70
10. JAH Ltd does not currently pay a dividend, but you expect that it will begin paying
$0.50 per share dividend at the end of year 2. The dividend is expected to grow at
20% per year for 3 years, and then slow to a sustained growth rate of 4% per year
thereafter. The market opportunity rate for investor in JAH shares is 13% p.a. What
is the price per share today that you expect JAH shares to sell at?
11. Eva Corp. is experiencing rapid growth. Dividends are expected to grow at 25
percent per year during the next three years, 15 percent over the following year, and
then 8 percent per year indefinitely. The required return on this stock is 13 percent,
and the stock currently sells for $76 per share. What is the projected dividend
for the coming year?
12. Great Pumpkin Farms just paid a dividend of $3.50 on its stock. The growth rate in
dividends is expected to be a constant 5 percent per year indefinitely. Investors
require a 14 percent return on the stock for the first three years, a 12 percent return
for the next three years, and a 10 percent return thereafter. What is the current
share price?
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FUNDAMENTAL OF FINANCIAL MANAGEMENT
January
1, 2015
13. It is now 31 December, 2014. Wayne-Martin Electric Inc. (WME) has just developed
a solar panel capable of generating 200% more electricity than any solar panel
currently on the market. As a result, you expect that WME will experience a 20%
annual growth rate of earnings for the next 2 years and 15% for the subsequent 3
years. By the end of 5 years, you believe that other firms will have developed
comparable technology, and WME’s growth rate will slow to 5% per year indefinitely.
You estimate that the required return on the WME’s shares is 12%. WME just
reported its annual earnings of $10.00 per share. WME follows a policy of
maintaining constant dividend payout ratio of 20% and pays dividends on the last
day of each year based on reported earnings.
a) What is WME’s dividend per share for 2014?
b) Using a dividend growth model, estimate the value of one WME share today.
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