1. Kenneth Clark is interested in purchasing the common stock of Pharoah, Inc., which is currently priced at $41.01. The company is expected to pay a dividend of $2.58 next year and to increase its dividend at a constant rate of 7.60 percent.
What should the market value of the stock be if the required rate of return is 14 percent? (Round answer to 2 decimal places, e.g. 15.20.) Market Value of Stock: $______
Is this a good buy? Yes or No
2. The required rate of return is 23.85 percent. Blossom Corp. has just paid a dividend of $3.12 and is expected to increase its dividend at a constant rate of 8.70 percent. What is the expected price of the stock three years from now? (Round answer to 2 decimal places, e.g. 15.20.)
Expected Price: $______
3. Crane Corp. will pay dividends of $5.00, $6.25, $4.75, and $3.00 in the next four years. Thereafter, management expects the dividend growth rate to be constant at 8 percent. If the required rate of return is 22.50 percent, what is the current value of the stock? (Round all intermediate calculations and final answer to 2 decimal places, e.g. 15.20.)
Current Value: $______
1)
Price of stock = D1 / required rate - growth rate
Price of stock = 2.58 / 0.14 - 0.076
Price of stock = 2.58 / 0.064
Price of stock = $40.3125
It is NOT a good buy as stock is trading above intrinsic value.
2)
Price of stock today = D1 / Required rate - growth rate
Price of stock today = (3.12 * 1.087) / 0.2385 - 0.087
Price of stock today = 3.39144 / 0.1515
Price of stock today = $22.3857
Price after 3 years = $22.3857 (1 + 0.087)3
Price after 3 years = $22.3857 * 1.2843664
Price after 3 years = $28.75
3)
year 5 dividend = 3 * 1.08 = 3.24
Year 4 value = D5 / required rate - growth rate
Year 4 value = 3.24 / 0.225 - 0.08
Year 4 value = 3.24 / 0.145
Year 4 value = $22.34
Current value of stock = 5 / (1 + 0.225)1 + 6.25 / (1 + 0.225)2 + 4.75 / (1 + 0.225)3 + 3 / (1 + 0.225)4 + 22.34 / (1 + 0.225)4
Current value of stock = $22.08
Get Answers For Free
Most questions answered within 1 hours.