Problem 1. General Cereal common stock dividends have been growing at an annual rate of 7 percent per year over the past 10 years. Current dividend (D0) is $1.70 per share. What is the current value of a share of this stock to an investor who requires a 12 percent rate of return if the following conditions exist?
a) Dividends are expected to continue growing at the historic rate for the foreseeable future.
b) The dividend growth rate is expected to increase to 9 percent per year.
c) The dividend growth rate is expected to decrease to 6.5 percent per year.
Problem 2. The Foreman Company's earnings and common stock dividends have been growing at an annual rate of 6 percent over the past 10 years and are expected to continue growing at this rate for the foreseeable future. The firm currently (D0) pays an annual dividend of $5 per share. Determine the current value of a share of Foreman common stock to investors with each of the following
required rates of return:
a. 12 percent
b. 14 percent
c. 16 percent
d. 6 percent
e. 4 percent
Problem 3: Over the past 5 years, the dividends of the Gamma Corporation have grown from $0.70 per share to the current level of $1.30 per share (D0). This growth rate is expected to continue for the foreseeable future. What is the value of a share of Gamma Corporation common stock to an investor who requires a 20 percent return on an investment?
Problem 4: The chairman of Heller Industries told a meeting of financial analysts that he expects the firm's earnings and dividends to double over the next 6 years. The firm's current (that is, as of year 0) earnings and dividends per share are $4 and $2, respectively.
a. Estimate the compound annual dividend growth rate over the 6-year period.
b. Assuming the forecasted growth rate in (a) will go on forever, how much is this stock worth today if investors require an 18 percent rate of return?
c. Why might the stock price calculated in (b) not represent an accurate valuation to an investor with an 18 percent required rate of return?
Problem 5: Calculate the book value per share based on the reported stockholders' equity account for Bridgford Foods in fiscal year ending November 2, 2005:
Shareholders' equity ('000)
Preferred stock, without par value
Authorized?1,000 shares
Issued and outstanding?none
Common stock, $1.00 par value $10,505
Capital in excess of par value 17,475
Retained earnings 29,355
Total shareholders' equity $57,335
Problem 6: The Kummins Engine Company common stock has a beta of 0.9. The current risk-free rate of return is 5 percent and the market risk premium is 8 percent. The CEO of the company is quoted in a press release as saying that the firm will pay a dividend of $0.80/share in the coming year and expects the dividends to grow at a constant rate of 7 percent for the foreseeable future. Using the constant growth model, what value would you assign to this stock?