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1. Boring, Inc. just paid a dividend of $1.50 per share on its stock. The dividends...

1. Boring, Inc. just paid a dividend of $1.50 per share on its stock. The dividends are expected to grow ata constant rate of 5 percent indefinitely. If the required return is 10% on the stock,

a. What is the current stock price (P0)?

b.What will be the price in three years (P3)?

(Hint for a and b: Use the constant dividend model)

2.The next dividend payment by Nespresso Co. will be $2.00 per share. The dividends are expected togrow at 5% forever. If the stock currently sells for $100 per share,

a. What is the required return (r)?

b. What is the dividend yield?

c. What is the capital gain yield?

3. How much are you willing to pay for one share of Salmon Brothers Co. stock today if the companyjust paid a $0.70 annual dividend, the dividends increase by 2 percent annually, and you require a 10percent rate of return? (Compute P0)

4.Netflix Corp. just paid a dividend of $1.30 per share. The dividends are expected to grow at 23% forthe next 8 years and then level off to a growth rate of 6% forever. If the required return is 12%, what isthe price of the stock today (P0)? (Hint: two-stage growth model)

5.Sally Corp. currently has an EPS of $3.00, and the benchmark PE for the company is 41. Earnings areexpected to grow at 4 percent per year.a.What is your estimate of the current stock price (P0)?b. What is the target stock price in year 4 (P4)?

PLEASE SHOW HOW YOU GOT ANSWERS!

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Expert Solution

1. Boring, Inc. just paid a dividend of $1.50 per share on its stock. The dividends are expected to grow at a constant rate of 5 percent indefinitely. If the required return is 10% on the stock,

a. What is the current stock price (P0)?

P0 = D1/(r - g)

D1 = 1.50 * (1 + 0.05)

D1 = 1.575

P0 = 1.575/(0.10 - 0.05)

P0 = $31.5

b.What will be the price in three years (P3)?

P3 = D4/(r - g)

D4 = D0 * (1 + g)^4

D4 = 1.50 * (1 + 0.05)^4

D4 = 1.823259375

P3 = 1.823259375/(0.10 - 0.05)

P3 = $36.4651875

2.The next dividend payment by Nespresso Co. will be $2.00 per share. The dividends are expected togrow at 5% forever. If the stock currently sells for $100 per share,

a. What is the required return (r)?

P = D1/(r - g)

r - g = D1/P

r = D1/P + g

r = 2/100 + 0.05

r = 0.07

r = 7%

b. What is the dividend yield?

Dividend yield = Next dividend/Price

Dividend yield = 2/100

Dividend yield = 0.02

Dividend yield = 2%

c. What is the capital gain yield?

P1 = D1 * (1 + g)/(r - g)

P1 = 2 * (1 + 0.05)/(0.07 - 0.05)

P1 = 105

Capital gain yield = P1/P0 - 1

Capital gain yield = 105/100 - 1

Capital gain yield = 0.05

Capital gain yield = 5%

jeff jeffy answered 1 year ago

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