Question

Martin Office Supplies paid a $8 dividend last year. The dividend is expected to grow at a constant rate of 5 percent over the next four years. The required rate of return is 15 percent (this will also serve as the discount rate in this problem). Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods.

a. Compute the anticipated value of the dividends for the next four years. (Do not round intermediate calculations. Round your final answers to 2 decimal places.)

	Anticipated Value D1 D2 D3 D4

b. Calculate the present value of each of the anticipated dividends at a discount rate of 15 percent. (Do not round intermediate calculations. Round your final answers to 2 decimal places.)

PV of Dividends

D1

D2

D3

D4

Total

c. Compute the price of the stock at the end of the fourth year (P₄). (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

d. Calculate the present value of the year 4 stock price at a discount rate of 15 percent. (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

e. Compute the current value of the stock. (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

f. Use the formula given below to show that it will provide approximately the same answer as part e. (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

P0	=	D1
		Ke − g

g. If current EPS were equal to $7.80 and the P/E ratio is 81% higher than the industry average of 6, what would the stock price be? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

h. By what dollar amount is the stock price in part g different from the stock price in part f? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

i. With regard to the stock price in part f, indicate which direction it would move if:

(1)D1 increases

(2)Ke increases

(3)g increases

Answer 1

a)

	Anticipated value
D1	8(1+.05)= 8.4
D2	8.4(1+.05)= 8.82
D3	8.82(1+.05)= 9.26
D4	9.26(1+.05)=9.72

b)

	Anticipated value	PVF15%	Anticipated value*PVF
D1	8(1+.05)= 8.4	.86957	7.3044
D2	8.4(1+.05)= 8.82	.75614	6.6692
D3	8.82(1+.05)= 9.26	.65752	6.0886
D4	9.26(1+.05)=9.72	.57175	5.5574
Total			25.62

c)

Price of stock at end of year 4 = D491+g) /(Required return -g)

                                 = 9.72(1+.05) /(.15-.05)

                                  = 9.72 *1.05 /.10

                                = $ 102.06

**assuming Dividend increases at 5%

d)

Present value of year 4 stock price =PVF15%,4*Price of stock at end of year 4

                             = .57175*102.06

                            = 58.35

E)current price of stock = Total of Dividend payment over 4 years +Present value of year 4 stock price

             = 25.62+58.35

               = $ 83.97   

f)P0 = 8 (1+ .05) /(.15-.05)

         = 8*1.05 / .10

          = $ 84      (approx to 83.97 )