Constant Growth Valuation

Crisp Cookware’s common stock is expected to pay a dividend of $2.25 a share at the end of this year (D1 = $2.25); its beta is 1.20; the risk-free rate is 2.9%; and the market risk premium is 6%. The dividend is expected to grow at some constant rate g, and the stock currently sells for $35 a share. Assuming the market is in equilibrium, what does the market believe will be the stock’s price at the end of 3 years (i.e., what is )? Do not round intermediate steps. Round your answer to the nearest cent.

Declining Growth Stock Valuation

Brushy Mountain Mining Company’s coal reserves are being depleted, so its sales are falling. Also, environmental costs increase each year, so its costs are rising. As a result, the company’s earnings and dividends are declining at the constant rate of 4% per year. If D0 = $4 and rs = 18%, what is the value of Brushy Mountain’s stock? Round your answer to the nearest cent.

Nonconstant Growth Stock Valuation

Assume that the average firm in your company’s industry is expected to grow at a constant rate of 4% and that its dividend yield is 5%. Your company is about as risky as the average firm in the industry, but it has just successfully completed some R&D work that leads you to expect that its earnings and dividends will grow at a rate of 50% [D1 = D0(1 + g) = D0(1.50)] this year and 20% the following year, after which growth should return to the 4% industry average. If the last dividend paid (D0) was $2.25, what is the value per share of your firm’s stock? Round your answer to the nearest cent. Do not round your intermediate computations.

Nonconstant Growth Stock Valuation

Simpkins Corporation does not pay any dividends because it is expanding rapidly and needs to retain all of its earnings. However, investors expect Simpkins to begin paying dividends, with the first dividend of $2.00 coming 3 years from today. The dividend should grow rapidly – at a rate of 80% per year – during Years 4 and 5. After Year 5, the company should grow at a constant rate of 8% per year. If the required return on the stock is 15%, what is the value of the stock today (assume the market is in equilibrium with the required return equal to the expected return)? Round your answer to the nearest cent. Do not round your intermediate computations.

Preferred Stock Valuation

Several years ago, Rolen Riders issued preferred stock with a stated annual dividend of 9% of its $100 par value. Preferred stock of this type currently yields 10%. Assume dividends are paid annually.

1. What is the value of Rolen’s preferred stock? Round your answer to the nearest cent.

$

2. Suppose interest rate levels have risen to the point where the preferred stock now yields 11%. What would be the new value of Rolen’s preferred stock? Round your answer to the nearest cent.

$

Return on Common Stock

You buy a share of The Ludwig Corporation stock for $21.50. You expect it to pay dividends of $1.05, $1.13, and $1.2161 in Years 1, 2, and 3, respectively, and you expect to sell it at a price of $31.57 at the end of 3 years.

1. Calculate the growth rate in dividends. Round your answer to two decimal places.

%

2. Calculate the expected dividend yield. Round your answer to two decimal places.

%

3. Assuming that the calculated growth rate is expected to continue, you can add the dividend yield to the expected growth rate to obtain the expected total rate of return. What is this stock’s expected total rate of return? Round your answer to two decimal places.

%

Constant Growth Stock Valuation

Investors require a 15% rate of return on Brooks Sisters’ stock (rs = 15%).

1. What would the value of Brooks’s stock be if the previous dividend was D0 = $4 and if investors expect dividends to grow at a constant compound annual rate of (1) – 7%, (2) 0%, (3) 4%, or (4) 10%? Round your answers to the nearest cent.

a. $

b. $

c. $

d. $