Question

2a.

Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on the stock over the next 12 years because the firm needs to plow back its earnings to fuel growth. The company will pay a $14 per share dividend in 13 years and will increase the dividend by 4 percent per year thereafter.

  

Required:

If the required return on this stock is 10 percent, what is the current share price? Note: find the price of the stock one year before the company starts paying a dividend, using the dividend growth model. Then find the PV of the price, using your TVM keys.  (Do not round your intermediate calculations.)

2b.

Far Side Corporation is expected to pay the following dividends over the next four years: $9, $8, $6, and $4. Afterward, the company pledges to maintain a constant 6 percent growth rate in dividends forever.

  

Required:

If the required return on the stock is 12 percent, what is the current share price? (Do not round your intermediate calculations.)

2c.

Marcel Co. is growing quickly. Dividends are expected to grow at a 23 percent rate for the next 3 years, with the growth rate reducing to only a constant 6 percent thereafter.

  

Required:

If the required return is 12 percent and the company just paid a $1.40 dividend, what is the current share price? Note: since the dividend at time 0 of $1.40 has just been paid, do not include it in the price at time 0.  (Do not round your intermediate calculations.)

2d.

Antiques R Us is a mature manufacturing firm. The company just paid a $12 dividend, but management expects to reduce the payout by 7 percent per year indefinitely.

  

Required :

If you require a(n) 14 percent return on this stock, what will you pay for a share today?

Answer 1