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1. Kenneth Clark is interested in purchasing the common stock of Pharoah, Inc., which is currently...

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: $______

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Homework Answers

Answer #1

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

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