Quantitative Problem 1: Hubbard Industries just paid a common dividend, D0, of $1.90. It expects
to grow at a constant rate of 3% per year. If investors require a 11% return on equity, what is the
current price of Hubbard's common stock? Round your answer to the nearest cent. Do not round
intermediate calculations.
$ per share
Zero Growth Stocks:
The constant growth model is sufficiently general to handle the case of a zero growth stock, where the
dividend is expected to remain constant over time. In this situation, the equation is:
Note that this is the same equation developed in Chapter 5 to value a perpetuity, and it is the same
equation used to value a perpetual preferred stock that entitles its owners to regular, fixed dividend
payments in perpetuity. The valuation equation is simply the current dividend divided by the required
rate of return.
Quantitative Problem 2: Carlysle Corporation has perpetual preferred stock outstanding that pays a
constant annual dividend of $1.50 at the end of each year. If investors require an 6% return on the
preferred stock, what is the price of the firm's perpetual preferred stock? Round your answer to the
nearest cent. Do not round intermediate calculations.
$ per share
Nonconstant Growth Stocks:
For many companies, it is not appropriate to assume that dividends will grow at a constant rate. Most
firms go through life cycles where they experience different growth rates during different parts of the
cycle. For valuing these firms, the generalized valuation and the constant growth equations are
combined to arrive at the nonconstant growth valuation equation:
Basically, this equation calculates the present value of dividends received during the nonconstant
growth period and the present value of the stock's horizon value, which is the value at the horizon
date of all dividends expected thereafter.
Quantitative Problem 3: Assume today is December 31, 2013. Imagine Works Inc. just paid a
dividend of $1.10 per share at the end of 2013. The dividend is expected to grow at 12% per year for
3 years, after which time it is expected to grow at a constant rate of 5% annually. The company's cost
of equity (rs) is 10%. Using the dividend growth model (allowing for nonconstant growth), what should
be the price of the company's stock today (December 31, 2013)? Round your answer to the nearest
cent. Do not round intermediate calculations.
$ per share
NONCONSTANT GROWTH
Computech Corporation is expanding rapidly and currently needs to retain all of its earnings; hence, it
does not pay dividends. However, investors expect Computech to begin paying dividends, beginning
with a dividend of $1.75 coming 3 years from today. The dividend should grow rapidly-at a rate of
23% per year-during Years 4 and 5; but after Year 5, growth should be a constant 7% per year. If the
required return on Computech is 14%, what is the value of the stock today? Round your answer to the
nearest cent. Do not round your intermediate calculations.
e. None of the above assumptions would invalidate the model.
Select
Quantitative Problem 1: Hubbard Industries just paid a common dividend, Do, of $1.90. It expects to grow at a constant rate of 3% per year. If investors require a 11% return on equity, what is
the current price of Hubbard's common stock? Round your answer to the nearest cent. Do not round Intermediate calculations.
per share
Zero Growth Stocks:
The constant growth model is sufficiently general to handle the case of a zero growth stock, where the dividend is expected to remain constant over time. In this situation, the equation is:
Po = 1 / 1
Note that this is the same equation developed in Chapter 5 to value a perpetuity, and it is the same equation used to value a perpetual preferred stock that entitles its owners to regular, fixed
dividend payments in perpetuity. The valuation equation is simply the current dividend divided by the required rate of return.
Quantitative Problem 2: Carlyle Corporation has perpetual preferred stock outstanding that pays a constant annual dividend of $1.50 at the end of each year. If investors require an 6% return on
the preferred stock, what is the price of the firm's perpetual preferred stock? Round your answer to the nearest cent. Do not round intermediate calculations.
per share
+
Nonconstant Growth Stocks:
For many companies, it is not appropriate to assume that dividends will grow at a constant rate. Most firms go through life cycles where they experience different growth rates during different parts
of the cycle. For valuing these firms, the generalized valuation and the constant growth equations are combined to arrive at the nonconstant growth valuation equation:
Ê
D
D.
Dy
+ ... +
+
(1+r)" (1+r) (1+r) (1+r)
Basically, this equation calculates the present value of dividends received during the nonconstant growth period and the present value of the stock's horizon value, which is the value at the horizon
date of all dividends expected thereafter.
Quantitative Problem 3: Assume today is December 31, 2013. Imagine Works Inc. just paid dividend of $1.10 per share at the end of 2013. The dividend is expected to grow at 12% per year
for 3 years, after which time it is expected to grow at a constant rate of 5% annually. The company's cost of equity (rs) is 10%. Using the dividend growth model (allowing for nonconstant growth),
what should be the price of the company's stock today (December 31, 2013)? Round your answer to the nearest cent. Do not round intermediate calculations.
per share
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Problem 9.14
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NONCONSTANT GROWTH
Computech Corporation is expanding rapidly and
currently needs to retain all of its earnings; hence, it does not pay dividends. However, investors expect Computech to begin paying dividends,
beginning with a dividend of $1.75 coming 3 years from today. The dividend should grow rapidly-at a rate of 23% per year-during Years 4 and 5; but after Year 5, growth should be a constant 7%
per year. If the required return on Computech is 14%, what is the value of the stock today? Round your answer to the nearest cent. Do not round your intermediate calculations.
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Problem 9.14
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