Question

In: Finance

Equations concerning Stock: Present Value (Price) of Stock with constant dividends (**Preferred Stock): P =...

Equations concerning Stock:

Present Value (Price) of Stock with constant dividends (**Preferred Stock):

P = D / r

Present Value(Price) of Stock with constant dividend growth rates (**Common Stock)

P = D/ (r – g) ***D = reflects change in dividend rate

Required return for the stock (**Common Stock)

r = D / P + g

Estimating future dividend growth (**Common Stock)

g = (P * r – D) / (P + D)

Keaubie Company has stock selling @ $125/share. They just paid a dividend of $8.75. Investors expect a return of 15% on their investment in the ABC Company. What is the expected growth rate of future dividends?

Gordon Company has bonds with a face value of $1000, a coupon rate of 9% with payments occurring semi-annually, and a 10-year life. Investors require a 12% rate of return on bonds of similar quality. What is the present value of this bond?

Madison Company has $1000 bonds that carry a coupon rate of 6% (semi-annual payments) and mature in 8 years.

a. Determine the present value of the bond’s cash flows if the required rate of return is 14%.

b. Determine the present value of the bond’s cash flows if the required rate of return is 4%.

4. Kameron Company stock is selling for $20/share. They just paid a dividend of $2.25/share. Their expected dividend growth rate is 5%.

a. What is the required rate of return on the stock?

b. If growth rate (annual) expectations change to 10%, what will be the required rate of return?

5. Morgan, Inc. has preferred stock that pays an annual dividend of $15. What does their stock sell for if the required rate of return on the stock is 14%?

6. Amee Company, Inc. recently paid a dividend on their common stock. The amount of the dividend was $5.75 (per share). Investors require an 15% rate of return on their investment. Their expected growth rate is 6%. What is the value of their stock?

Expert Solution

1.

Growth rate for Keaubie Company is calculated in excel and screen shot provided below:

g = (P × r – D) / (P + D)

= ($125 × 15%) - $8.75 / ($125 + $8.75)

= ($18.75 - $8.75) / $133.75

= $10 / $133.75

= 7.48%

Growth rate is 7.48%.

2.

Present Value of bond is calculated in excel and screen shot provided below:

Price of bond is $827.95.

3.

Price of Madison Company bond at Required rate of 14% is calculated in excel and screen shot provided below:

Price of Madison Company bond at Required rate of 14% is $622.13.

Price of Madison Company bond at Required rate of 4% is calculated in excel and screen shot provided below:

Price of Madison Company bond at Required rate of 4% is $1,135.78.

jeff jeffy answered 2 years ago

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