Question

Dividend discount model - ex. #2

Seventy-five million shares ($ .01 par) of Leonard Skinner Gym Clothes Corp. have been authorized. There are currently 34 million shares outstanding. The stock is expected to pay a dividend of $ .60/share at the end of 12 months.

a) What corporate document authorizes the company's common stock?

b) If 5 million shares of common are currently held as treasury stock, how many shares of Leonard Skinner Gym Clothes Corp. have been issued?

c)  Using the dividend discount model, what is the current market value of the company's stock (i.e., P0)? Assume a dividend growth rate of 4%, that your required rate of return for the stock is 11% and that the market is at equilibrium.

d) Who was Leonard Skinner?

Answer 1

shares outstanding , O = 34 million

expected dividend, D1 = $0.60

a) Article of Incorporation is the corporate document that authorizes company's common stock

b)Issued shares = outstanding shares + treasury stock = 34 million + 5 million = 39 million

c) growth rate of dividend , g = 4% = 0.04

required rate of return, R = 11%

current price per share, P0 = D1/(R-g) = 0.60/(0.11-0.04) = 0.60/0.07 = $8.57142 or $8.57 per share ( rounding off to 2 decimal places)

d) Leonar skinner was a basket ball coach, a businessman from Jacksonville, Florida and an American high school gym teacher