Question

Because of a lucky breakthrough, Philadelphia Pharmaceutical’s current dividend per share of $2.00 is expected to grow at a very high 32 percent per year for the next three years and then to grow at a more normal 6 percent per year. What is the value of a Philadelphia share if the investors’ expected return is 20 percent?

Answer #1

Price of a stock is the present value of all future cash flows receivable from the stock discounted at required rate of return

Future cash flows are annual dividends and expected value of share at the end of the period from where it is expected to grow at a constant rate

Expected dividend next year D1

= Current dividend x (1 + Growth)

= $2 x 1.32

= $ 2.64

Expected dividend for the second year D2

= D1 x (1 + Growth)

= $2.64 x 1.32

= $3.48

Similarly, D3

= $3.48 x 1.32

= $4.60

Expected price of the stock at the end of 3^{rd}
year

= D4 / (Re – G)

= D3 x (1 + Growth) / (Re – G)

= $4.60 x 1.06 / (0.20 – 0.06)

= $ 34.83

Present value factor

= 1 / (1 + r) ^n

Where,

r = Required rate of return = 20% or 0.20

n = Years 1 to 3

So, PV Factor for year 2

=1 / 1.20^2

= 1 / 1.44

= 0.694444

The following table shows the calculations

Calculations | A | B | C = A x B |

Year | Cash Flow | PV Factor | Present Value |

1 | 2.64 | 0.833333 | 2.20 |

2 | 3.48 | 0.694444 | 2.42 |

3 | 4.60 | 0.578704 | 2.66 |

3 | 34.83 | 0.578704 | 20.16 |

Price | 27.43 |

So, as per above calculations, price of the stock today is $27.43

Alberto Inc. just paid its annual dividend of $2.00
per share. The firm is expected to grow at a rate of 10 percent for
the next two years and then at 6 percent per year thereafter. The
required return of Alberto Inc. is 12%. Find the expected price of
the stock in one year, P ̂_1.

1. Sky High Co. just paid a dividend of $2.0 per share on its
stock. The dividends are expected to grow at a constant rate of 2
percent per year indefinitely. If investors require an 8.6 percent
return on Sky High Co. stock, the current price is $ _________ .
Round it to two decimal places
2. Sky High Co. just paid a dividend of $4.6 per share on its
stock (D0). The dividends are expected to grow at a...

The current dividend on ALH common stock is $0.85 per share. The
market expects the company’s dividend to grow at 40 percent per
year for the next four years and then remain constant (i.e. not
grow) thereafter. If investors require an eight percent return to
hold this stock, what is its current market price.

Dvorak Enterprises is expected to pay a stable dividend of $7
per share per year for the next 8 years. After that, investors
anticipate that the dividends will grow at a constant rate of 3
percent per year indefinitely. If the required rate of return on
this stock is 12 percent, what is the fair market value of a share
of Dvorak?

Company XYZ is expected to pay a cash dividend of $0.50 per
share at the end of this year. Investors require a 15% return. If
the dividend is expected to grow at a steady 6% per year, what is
the current value of a share?

Kai Zen Motors currently pays a dividend of $2 per
share, and this dividend is expected to grow at a 13 percent annual
rate for three years, and then at a 11 percent rate for the next
two years, after which it is expected to grow at a 6 percent rate
forever. What value would you place on the stock if a 16 percent
rate of return were required?

WIE is a public company expected to pay a $2.00 dividend next
year, and investors expect that dividend to grow by 6% each year
forever. If the required return on the share investment is 12%,
what should be the price of a share in five years?
Select one:
a. $42.28
b. $18.32
c. $44.52
d. $17.44

Paper Corporation currently pays a dividend of $2 per share, and
this dividend is expected to grow at a 15 percent annual rate
for
three years, and then at a 10 percent rate for the next three
years, after which it is expected to grow at a 5 percent rate
forever. What
value would you place on the stock if an 18 percent rate of return
was required? (make a timeline)

The Kosten Warenhaus just paid a dividend of $2.00 (D0 =
$2.00)per share, and that dividend is expected to grow at a
constant rate of 7.50% per year in the future. The company’s beta
is 0.93, the market return is 9.0%, and the risk-free rate is
4.00%.
1. What is the required return on the stock, rs?
[Hint: Kj=Krf + B(Km – Krf)]
2. What is the company’s current stock price?

JTBC, Inc. just paid $2.00 dividend. Dividends are expected to
grow at a 20% rate for the next four years. After that, the company
has stated that the annual dividend will be $1.00 per share
indefinitely. The required rate of return is 10%.
a) What is the current stock price?

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 40 minutes ago

asked 53 minutes ago

asked 58 minutes ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 2 hours ago

asked 2 hours ago

asked 2 hours ago