Question

MG Inc. is a profitable company that is not paying a dividend on its common stock....

MG Inc. is a profitable company that is not paying a dividend on its common stock. Analyst Weber believes that MG will begin paying a $4.00 per share dividend in five years and that the dividend will increase 7% annually thereafter. If Weber believes the required return for MG is 12%, what is his estimated current value of MG’s common stock?

a. $50.84
b. $80.00
c. $33.33
d. $72.46
e. $45.39
Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

No dividends will be paid on the stock over the next 4 years. Once the stock begins paying dividends, it will have a constant growth rate of dividends.

Pt = [Dt × (1 + g)] / (R − g)

The price of the stock in Year 4 will be:

P4 = D5 / (R − g) = $4.00 / (0.12 − 0.07) = $80

The price of the stock today is simply the PV of the stock price in the future. We simply discount the future stock price at the required return. The price of the stock today will be:

P0 = $80 / 1.12^5 = $45.39

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
1. Stock Values Courageous, Inc. just paid a dividend of $1.80per share on its stock. The...
1. Stock Values Courageous, Inc. just paid a dividend of $1.80per share on its stock. The dividends are expected to grow at a constant rate of 3 percent per year, indefinitely. If investors require a 12 percent return on Courageous stock, what is the current price? What will the price be in 3 years? In 15 years? PART A: Current Price: $____________. PART B: Price in Three Years: $____________. PART C: Price in Fifteen Years: $____________. #4 Stock Values The...
QUESTION 10 A common stock just paid a $2.00 dividend that will grow at 7% for...
QUESTION 10 A common stock just paid a $2.00 dividend that will grow at 7% for year 1, then at 3% for years 2 and 3, then at 2% thereafter. Using a required return of 8%, what is the intrinsic value of the common stock? $36.31 $33.33 $29.36 $31.25 none of these
Q1/Character Co. offers a common stock that pays an annual dividend of $3.36 a share. The...
Q1/Character Co. offers a common stock that pays an annual dividend of $3.36 a share. The company has promised to maintain a constant dividend. How much are you willing to pay for one share of this stock if you want to earn a 7.82 percent return on your equity investments? Q2/The Onboard Co. is a new firm in a rapidly growing industry. The company is planning on increasing its annual dividend by 23.3 percent a year for the next 3...
McCaffrey's Inc. has never paid a dividend, and when the firm might begin paying dividends is...
McCaffrey's Inc. has never paid a dividend, and when the firm might begin paying dividends is not known. Its current free cash flow (FCF) is $100,000, and this FCF is expected to grow at a constant 7% rate. The weighted average cost of capital (WACC) is 11%. McCaffrey's currently holds $325,000 of non-operating marketable securities. Its long-term debt is $1,000,000, but it has never issued preferred stock. McCaffrey's has 50,000 shares of stock outstanding. Calculate the following: McCaffrey's value of...
ABC Inc. just announced it is increasing its annual dividend to $2.00 next year and establishing...
ABC Inc. just announced it is increasing its annual dividend to $2.00 next year and establishing a policy whereby the dividend will increase by 2 percent annually thereafter. (1) What will the dividend be 5 years from now? (2) How much will one share of this stock be worth 10 years from now if the required rate of return is 7 percent?
Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on the stock...
Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on the stock over the next 12 years because the firm needs to plow back its earnings to fuel growth. The company will pay a $11 per share dividend in 13 years and will increase the dividend by 7 percent per year thereafter.    Required: If the required return on this stock is 13 percent, what is the current share price? (Do not round your intermediate calculations.)
A company just paid an annual dividend of $5.00 per share on its common stock. Due...
A company just paid an annual dividend of $5.00 per share on its common stock. Due to the success of a new product, the firm expects to achieve a dramatic increase in its short-term growth rate in sales to 30 percent annually for the next three years. After this time, the growth rate in sales is expected to return to the long-term constant rate of 6 percent per year. Assume that the company’s dividend growth rate matches the rate of...
Wii U announced today that it will begin paying annual dividends. The first dividend will be...
Wii U announced today that it will begin paying annual dividends. The first dividend will be paid next year in the amount of $1 a share. The following dividends will be $1.2, and $1.37 a share annually for the following two years, respectively. After that, dividends are projected to increase by 4 percent per year. How much are you willing to pay today to buy one share of this stock if your desired rate of return is 12 percent?
Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on the stock...
Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on the stock over the next 14 years because the firm needs to plow back its earnings to fuel growth. The company will pay a $8 per share dividend in 15 years and will increase the dividend by 7 percent per year thereafter. If the required return on this stock is 11 percent, what is the current share price?
Bretton, Inc., just paid a dividend of $3.00 on its stock. The growth rate in dividends...
Bretton, Inc., just paid a dividend of $3.00 on its stock. The growth rate in dividends is expected to be a constant 4 percent per year, indefinitely. Investors require a return of 11 percent on the stock for the first three years, a rate of return of 9 percent for the next three years, and then a return of 7 percent thereafter. What is the current share price for the stock? (Do not round intermediate calculations and round your answer...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT