1. A share of common stock has just paid a dividend of $2.00. If the expected long-run growth rate for this stock is 4.0%, and if investors' required rate of return is 10.5%, what is the stock's intrinsic value?
2. E. M. Roussakis Inc.'s stock currently sells for $40 per share. The stock's dividend is projected to increase at a constant rate of 4% per year. The required rate of return on the stock, rs, is 15.50%. What is Roussakis' expected price 5 years from now?
3. Carter's preferred stock pays a dividend of $1.75 per quarter. If the price of the stock is $60.00, what is its nominal (not effective) annual expected rate of return?
4. Schnusenberg Corporation just paid a dividend of $1.25 per share, and that dividend is expected to grow at a constant rate of 7.00% per year in the future. The company's beta is 1.25, the required return on the market is 10.50%, and the risk-free rate is 4.00%. What is the intrinsic value for Schnusenberg's stock?
5. Rentz RVs Inc. (RRV) is presently enjoying relatively high growth because of a surge in the demand for recreational vehicles. Management expects earnings and dividends to grow at a rate of 30% for the next 4 years, after which high gas prices will probably reduce the growth rate in earnings and dividends to zero, i.e., g = 0. The company's last dividend, D0, was $1.25. RRV's beta is 1.20, the market risk premium is 5.50%, and the risk-free rate is 3.00%. What is the intrinsic value of RRV's common stock?
6. Using the information on Rentz RVs Inc. from problem 6, what is the dividend yield expected for the next year?
7. The Wei Company's last paid dividend was $2.75. The dividend growth rate is expected to be constant at 2.50% for 2 years, after which dividends are expected to grow at a rate of 8.00% forever. Wei's required return (rs) is 15.00%. What is the intrinsic value of Wei's stock?
8. Using the information on Wei Company from problem 8, what should be the price of Wei's stock at the end of Year 5?
9. You are an analyst studying Beranek Technologies, which was founded 10 years ago. It has been profitable for the last 5 years, but it has needed all of its earnings to support growth and thus has never paid a dividend. Management has indicated that it plans to pay a $0.50 dividend 3 years from today, then to increase it at a relatively rapid rate for 2 years with 50% dividend growth in year 4 and 25% dividend growth in year 5, and then to increase its dividend at a constant growth rate of 6.00% per year thereafter. Assuming a required return of 15.00%, what is your estimate of the intrinsic value of Beranek's stock?
10. Hettenhouse Company's (HC) perpetual preferred stock sells for $105.50 per share, and it pays a $9.50 annual dividend. If the company were to sell a new preferred issue, it would incur a flotation cost of 4.00% of the price paid by investors. HC's marginal tax rate is 30%. What is the company's cost of preferred stock for use in calculating the WACC?
11. Scanlon Inc.'s CFO hired you as a consultant to help her estimate the cost of capital. You have been provided with the following data: the risk-free rate of return is 4.00%; the market risk premium is 6.00%; and Scanlon's beta is 0.95. Based on the CAPM approach, what is the cost of equity from retained earnings?
12. Assume that you are a consultant to Broske Inc., and you have been provided with the following data: D1 = $1.80; P0 = $45.50; and g = 7.00% (constant). What is the cost of equity from retained earnings based on the DCF approach?
13. P. Lange Inc. hired your consulting firm to help them estimate the cost of equity. The yield on Lange's bonds is 7.25%, and your firm's economists believe that the cost of equity can be estimated using a risk premium of 3.50% over a firm's own cost of debt. What is an estimate of Lange's cost of equity from retained earnings?
14. In their most recent fiscal year, XYZ, Inc. had net income of $15 million and total common equity of $200 million. Also, XYZ, Inc. pays out 40% of its earnings as dividends. Using the Retention Growth Model, what is your best estimate of XYZ's expected growth rate?