Question

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The Foreman Company’s earnings and common stock dividends have been growing at an annual rate of...

The Foreman Company’s earnings and common stock dividends have been growing at an annual rate of 7 percent over the past 10 years and are expected to continue growing at this rate for the foreseeable future. The firm currently (that is, as of year 0) pays an annual dividend of $6 per share. Determine the current value of a share of Foreman common stock to investors with each of the following required rates of return. Use a minus sign to indicate negative answers and NA to indicate undefined answers. Round your answers to the nearest cent.

  1. 11 percent
    $  
  2. 12 percent
    $  
  3. 14 percent
    $  
  4. 7 percent
    $  
  5. 5 percent
    $  

Solutions

Expert Solution

Dividend is been growing over past 10 years and continue to grow for foreseeable future at (g)= 7%

Annual Dividend just paid (D0) = $6 per share

Calculating the Value of Stock with each of the following required rates of return:-

1). Required Rate of return(Ke) = 11%

P0 = $160.5

So, Current value of share is $160.5

2). Required Rate of return(Ke) = 12%

P0 = $128.4

So, Current value of share is $128.4

3). Required Rate of return(Ke) = 14%

P0 = $91.71

So, Current value of share is $91.71

4). Required Rate of return(Ke) = 7%

P0 = NA

So, Current value of share is NA

5). Required Rate of return(Ke) = 5%

P0 = -$321

So, Current value of share is -$321

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