Question 1: Warr corporation just paid a dividend of $1.50 a share (i.e., D0 =$1.50). the dividend is expected to grow 5 percent a year for the next 3 years, and then 10 percent a year thereafter. What is the expected dividend per share for each of the next 5 years?
Question 2: A stock is trading at $80.00 per share. The stock is expected to have a year-end dividend of $4.00 per share (D1 = 4), which is expected to grow at some constant rate g throughout time. The stock’s required rate of return is 14 percent. If you are an analyst who believes in efficient markets, what, what would be your forecast of g?
Question 3: Your broker offers to sell you some shares of Bahnsen & Co. common stock that paid a dividend of $2 yesterday. You expect the dividend to grow at a rate of 5 percent per year for the next 3 years, and if you buy the stock, you plan to hold it for 3 years and then sell it.
a) Calculate the present value of this stock, assume that g = 5% and it is constant
b) Is the value of this stock dependent upon how long you plan to hold it? In other words, if your planned holding period were 2 years or 5 years rather than 3 years, would this affect the value of the stock today, Poˆ?
Question 4: Calculate the after-tax cost of debt under each of the following conditions
a) interest rate, 13 percent; tax rate 0 percent.
b) interest rate, 13 percent; tax rate 20 percent
c) interest rate, 13 percent; tax rate 35 percent
Question 5: The earnings, dividends, and stock price of Carpetto technologies inc. are expected to grow 7 percent per year in the future. Carpetto’s common stock sells for $23.00 per share, its last dividend was $2.00, and the company will pay a dividend of $2.14 at the end of the current year.
a) Using the discounted cash flow approach, what is the cost of the equity?
b) If the firm’s beta is 1.6, the risk free rate is 9 percent, and the expected return on the market is 13 percent, what will be the firm’s cost of equity using the CAPM approach?
c) If the firm’s bonds earn a return of 12 percent, what will R8 be using the bond-yield-plus-risk-premium approach? (Use the mid-point of the risk premium range).
d) On the basis of the results of parts a through c, what would you estimate Carpetto’s cost of equity to be?
Question 6: The Bouchard Company’s current EPS is $6.50. It was $4.42 5 years ago. The company pays out 40 percent of its earnings as dividends, and the stock sells for $36.
a) Calculate the past growth rate in earnings. (This is a 5 year growth period).
b) Calculate the next expected dividend per share, D1. (D0 = 0.4($6.50)=$2.60) Assume that the past growth rate will continue.
c) What is the cost of equity, R8, for the Bouchard company?