This morning, you arrived at your job as Head of Client Advisory Services for a major investment firm and received a distressing phone call. Mrs. Smith, one of your best clients, who just happened to become your mother in law shortly after her retirement, has passed away.
As the investment expert in the family, it will be your task to values Mrs. Smith's substantial estate, which consists mostly of stock investments which you have recommended. Making your task complicated is the fact that following your advice, Mrs. Smith has invested mostly in companies whose stocks are not publicly traded or listed. As a matter of fact, most of Mrs. Smith's investments are in companies headed by some of your college buddies.
Mrs. Smith's portfolio consists of the 10 stocks described below. Your task is to value each individually and aggregate the values to come up with the total value of Mrs. Smith's estate. As one of the heirs, you are highly motivated to come up with the correct valuation.
1. 2,000 shares of The Chug-Chug Breweries Co. which just paid a dividend of $1.95 per share. The dividends are expected to grow at a constant rate of 6 percent per year indefinitely. Investors require an 11 percent return on This company's stock
2. 1,500 shares of Aqua-Pedic Mattress Corporation that will pay a $3.04 per share dividend next year. The company pledges to increase its dividend by 3.8 percent per year indefinitely. Investors require an 11 percent return on this investment.
3. 500 shares of Big Bang Inc. paying a constant $9.75 dividend. The company will maintain this dividend for the next 11 years and will then cease paying dividends forever. Investor's required return on this stock is 10 percent.
4. 3,000 shares of E&E Online booksellers that just paid a dividend of $3.50. 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.
5. 100 shares of Up All Night Video Games, Inc. This 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. The required return on this stock is 14 percent.
6. 2,500 shares of Cake in a Cup Bakeries, a rapidly growing company. Dividends are expected to grow at a 30 percent rate for the next three years, with the growth rate falling off to a constant 6 percent thereafter. The required return is 13 percent and the company just paid a $1.80 dividend.
7. 750 shares of Agave Chips and Snacks; a mature manufacturing firm. The company just paid a $10.46 dividend, but management expects to reduce the payout by 4 percent per year indefinitely. Investors require an 11.5 percent return on this stock.
8. 1,200 newly issued preferred shares of Lighter.com. The issue will pay a $20 annual dividend in perpetuity, beginning 20 years from now. The market requires a 6.4 percent return on this investment.
9. 300 shares of Coolman Socks Investments Corp. The company just paid a dividend of $1.25 per share. The dividends are expected to grow at 28 percent for the next eight years and then level off to a 6 percent growth rate indefinitely. The required return is 13 percent.
10. 900 shares of Netbail.com, expected to pay the following dividends per share in the next four years: $11, $8, $5 and $2. Afterwards, the company pledges to maintain a constant 5% growth rate in dividends forever. The required return on the stock is 12%
For each of the 10 investments described above, indicate your calculated valuation for the stock, your calculated valuation for the estate's total holdings of the stock (value per share X number of shares held) and the total value of the estate (sum of total holdings of all ten stocks).
11. For a 1 point bonus (not to exceed 10 points total), you are considering starting a college fund for Mrs. Smith's grandchildren (your kids). Interflix.com just announced that it will be paying a dividend of $2.10 per share and expects to maintain a 5% growth rate forever. If you can buy the stock at $48 per share, what will your return be?
12. For a 1 point bonus (not to exceed 10 points total), you are considering investing part of the proceeds of your share of the estate in the stock of Yeskia, Inc. The shares are currently selling at $47 and the required return on the stock is 11 percent. Additionally, the total return on the stock is evenly divided between capital gains yield and a dividend yield. If the company's policy is to always maintain a constant growth rate in its dividend, what is the current dividend per share?