Problem 1: Company Z's earnings and dividends per share are expected to grow indefinitely by 5 percent a year. If next year's dividend is $10 and the market capitalization rate is 8 per-cent, what is the current stock price?
Problem 2: Company Z-prime is like Z in all respects save one: Its growth will stop after year 4. In year 5 and afterward, it will pay out all earnings as dividends. What is Z-prime's stock price? Assume next year's EPS is $15. 20.
Problem 3: KIC, Inc., plans to Issue $5 million of perpetual bonds.The face value of each bond Is $1,000. The annual coupon on the bonds Is 12 percent. Market Interest rates on one-year bonds are 11 percent. With equal probability, the long-term market Interest rate will be either 14 per-cent or 7 percent next year. Assume Investors are risk-neutral.
a. If the KIC bonds are noncallable, what Is the price of the bonds?
b. If the bonds are callable one year from today at $1,450, will their price be greater than or less than the price you computed In (a)?Why?