PROBLEM 1
A person is considering buying the stock of two home health companies that are similar in all respects except for the proportion of earnings paid out as dividends. Both companies are expected to earn $6 per share in the coming year, but Company D (for dividends) is expected to pay out the entire amount one year from now as dividends, while Company G (for growth) is expected to pay out only one-third of its earnings or $2 per share. The companies are equally risky, and their required rate of return is 15 percent. D's constant growth rate is zero and G's is 8.33 percent. What are the expected prices of Stocks D and G?
PROBLEM 2
Medical Corporation of America (MCA) has a current stock price of $36, and its last dividend (D0) was $2.40. In view of MCA's strong financial position, its required rate of return is 12 percent. If MCA's dividends are expected to grow at a constant rate in the future, what is the firm's expected stock price in five years?
PROBLEM 3
A broker offers to sell you shares of Bay Area Healthcare, which just paid a dividend of $2 per share. The dividend is expected to grow at a constant rate of 5 percent per year. The stock's required rate of return is 12 percent.
a. What is the expected dollar dividend over the next three years?
b. What is the current value of the stock and the expected stock price at the end of each of the next three years?
c. What is the expected dividend yield and capital gains yield for each of the next three years?
d. What is the expected total return for each of the next three years? How does the expected total return compare with the required rate of return on the stock? Does this make sense? Explain your answer.
PROBLEM 4
Assume the risk-free rate is 6 percent and the market risk premium is 6 percent. The stock of Physicians Care Network (PCN) has a beta of 1.5. The last dividend paid by PCN (D0) was $2 per share.
a. What would PCN's stock value be if the dividend was expected to grow at a constant -5 percent?
0 percent? 5 percent? 10 percent?
b. What would be the stock value if the growth rate is 10 percent, but PCN's beta falls to 1.0? 0.5?
PROBLEM 5
Better Life Nursing Home, Inc., has maintained a dividend payment of $4 per share for many years. The same dollar dividend is expected to be paid in future years. If investors require a 12 percent rate of return on investments of similar risk, determine the value of the company's stock.
PROBLEM 6
Jane's sister-in-law, a stockbroker at Invest, Inc., is trying to get Jane to buy the stock of HealthWest, a regional HMO. The stock has a current market price of $25, its last dividend (D0) was $2, and the company's earnings and dividends are expected to increase at a constant growth rate of 10 percent. The required return on this stock is 20 percent. From a strict valuation standpoint, should Jane buy the stock?
PROBLEM 7
Lucas Clinic's last dividend (D0) was $1.50. Its current equilibrium stock price is $15.75, and its expected growth rate is a constant 5 percent. If the stockholders' required rate of return is 15 percent, what is the expected dividend yield and expected capital gains yield for the coming year?
PROBLEM 8
St. John Medical, a surgical equipment manufacturer, has been hit hard by increased competition. Analysts predict that earnings and dividends will decline at a rate of 5 percent annually into the foreseeable future. If the firm's last dividend (D0) was $2, and investors' required rate of return is 15 percent, what will be the company's stock price in three years?
PROBLEM 9
California Clinics, an investor-owned chain of ambulatory care clinics, just paid a dividend of $2 per share. The firm's dividend is expected to grow at a constant rate of 5 percent per year, and investors require a 15 percent rate of return on the stock.
a. What is the stock's value?
b. Suppose the riskiness of the stock decreases, which causes the required rate of return to fall to 13 percent. Under these conditions, what is the stock's value?
c. Return to the original 15 percent required rate of return. Assume that the dividend growth rate estimate is increased to a constant 7 percent per year. What is the stock's value?
PROBLEM 10
Conner Health Inc. has a stock price of $32.35 per share. The last dividend (D0) was $3.42. The long-run growth rate for the company is a constant 7 percent. What is the company's capital gains yield and dividend yield?