FIN515 Week 4 Homework Assignment

Apr 24th, 2015
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FIN515 Week 4 Homework Assignment

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(7-2) Constant Growth ValuationBoehm Incorporated is expected to pay a $1.50 per share dividend at the end of this year (i.e., D1 = $1.50). The dividend is expected to grow at a constant rate of 7% a year. The required rate of return on the stock, rs, is 15%. What is the value per share of Boehm's stock?Ans:D1$1.50 g7%rs15%Stock price$18.75Value per share of Boehm's stock = D1 /(rs - g) = 1.50 /(0.15-0.07) = 1.50/0.08 = $18.75(7-4) Preferred Stock ValuationNick's Enchiladas Incorporated has preferred stock outstanding that pays a dividend of $5 at the end of each year. The preferred sells for $50 a share. What is the stock's required rate of return?Ans:Dps$5.00 rps10%Vps$50.00 Stock's required rate of return = Dps (the preferred dividend) / Vps (value of the preferred stock)Stock's required rate of return = 5 /50 = 0.10 = 10 %(7-5) Non-constant Growth ValuationA company currently pays a dividend of $2 per share (D = $2). It is estimated that the company's dividend will grow at a rate of 20% per year for the next 2 years, then at a constant rate of 7% thereafter. The company's stock has a beta of 1.2, the risk-free rate is 7.5%, and the market risk premium is 4%. What is your estimate of the stock's current price?Ans:Stock Required rate of return = rs = 0.075+ 1.2 * 0.04 = 0.123 = 12.3 %D0$2.00 g0 to 120.0%g1 to 220.0%gn7.0%rs12.3%Year12D1D2Expected dividends$2.40 $2.88 Exp

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