Question

1.Crosby Inc. has an 11% required rate of return. It will not pay any dividend until...

1.Crosby Inc. has an 11% required rate of return. It will not pay any dividend until the end of year 20 at which time it will begin to pay an annual dividend of $4.00 per share which it will hold constant thereafter. What is an estimate of the price of Crosby's stock TODAY?

A.

$5.01

B.

$36.36

C.

$4.44

D.

$32.76

2.

If Temple Lunch Trucks dividend was expected to grow at a constant rate of 5% instead of 4%, what is the most that you should be willing to pay for a share of this stock today?

A.

$52.50.

B.

$47.50

C.

$50.00

D.

$43.78

3.

True or False: Ceteris

paribus ,

dividend growth rates and stock prices are directly related.

a)True

b)False

Homework Answers

Answer #1

1.A.$5.01.

price of the stock at the end of 19th year = D / r

since dividends are paid at the end of 20th year, we need to calculate the price of the stock at the end of 19th year first.

=> $4 /0.11

=>$36.36.

now,

the value of stock today will be = present value factor for 19 years @11% * stock price at the end of 19 years.

=>$36.36*(1 /(1+r)^n)

=>36.36*0.13767764

=>$5.01....(rounded to two decimals)

2nd question:

A.$52.50

price = D*(1+g) / (k-g)

=>$2*(1.05) / (0.09-0.05)

=>$2.10/0.04

=>$52.50.

3rd question:

True.

All else remaining same, the stock price will be higher with a higher growth rate.

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
A company has a 15.50% required rate of return and will not pay any dividends for...
A company has a 15.50% required rate of return and will not pay any dividends for the next seven years. At the beginning of year 8, it will pay a dividend of $4.75 per share. The dividend (always paid at the beginning of a year) is expected to grow at 9.75% annually from that point onwards. Calculate the stock price today.
Q2 A company has a 11.00% required rate of return and will not pay any dividends...
Q2 A company has a 11.00% required rate of return and will not pay any dividends for the next seven years. At the beginning of year 8, it will pay a dividend of $2.50 per share. The dividend (always paid at the beginning of a year) is expected to grow at 7.50% annually from that point onwards. Calculate the stock price today. Question 2 options: $37.23 $38.19 $39.14 $40.10 $41.05
Davidson, Inc. is experiencing a period of rapid growth. Davidson will pay a dividend of $1.25...
Davidson, Inc. is experiencing a period of rapid growth. Davidson will pay a dividend of $1.25 a share in one year from today. Dividends are expected to grow at 25% in the second year and at 20% in the third year. However, as a result of competition, dividends are expected to grow at a constant rate of 5% (per year) thereafter. The equity cost of capital is 15%. (12 points) a) What are the dividends over the next four years?...
1) A firm with return on equity (ROE) less than its cost of capital: A. would...
1) A firm with return on equity (ROE) less than its cost of capital: A. would increase firm value by retaining all its earnings for growth of the firm B. should pay out earnings to investors as dividends rather than retain earnings for growth C. will generally have relatively high P/E ratios D. all of the above 2) A company recently paid out a $4 per share dividend on their stock. Dividends are projected to grow at a constant rate...
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...