Question

Part 1

Company Z-prime’s earnings and dividends per share are expected to grow by 2% a year. Its growth will stop after year 4. In year 5 and afterward, it will pay out all earnings as dividends. Assume next year’s dividend is $10, the market capitalization rate is 12% and next year’s EPS is $17. What is Z-prime’s stock price? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Part 2

Company's Z's earnings and dividends per share are expected to grow indefinitely by 2% a year. Assume next year's dividend per share is $3 and next year's EPS is $4. The market capitalization rate is 10%. If Company Z were to distribute all of its earnings, it could maintain a level dividend stream of $4 a share. How much is the market actually paying per share for growth opportunities? (Do not round intermediate calculations. Negative amount should be indicated by a minus sign. Round your answer to 2 decimal places.)

Present value growth opportunities            $

Part 3

1. Stock A is expected to provide a dividend of $11.50 a share forever.
2. Stock B is expected to pay a dividend of $6.50 next year. Thereafter, dividend growth is expected to be 4.00% a year forever.
3. Stock C is expected to pay a dividend of $4.50 next year. Thereafter, dividend growth is expected to be 20.00% a year for five years (i.e., years 2 through 6) and zero thereafter.

a-1. If the market capitalization rate for each stock is 10.00%, what is the stock price for each of the stocks? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

	Stock Price
Stock A	$
Stock B	$
Stock C	$

a-2. Which stock is the most valuable?

	Stock C
	Stock B
	Stock A

b-1. If the market capitalization rate for each stock is 7.00%, what is the stock price for each of the stocks? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

	Stock Price
Stock A	$
Stock B	$
Stock C	$

b-2. Which stock is the most valuable?

	Stock A
	Stock B
	Stock C

Part 4

Pharmecology just paid an annual dividend of $1.45 per share. It’s a mature company, but future EPS and dividends are expected to grow with inflation, which is forecasted at 3.25% per year. The nominal cost of capital is 10.00%.

a. What is Pharmecology’s current stock price? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Current stock price            $

b. What would be Pharmecology’s current stock price using forecasted real dividends and a real discount rate? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Current stock price            $

Answer 1