Question

Hubbard Industries just paid a common dividend, D0, of $1.20. It expects to grow at a constant rate of 2% per year. If investors require a 12% return on equity, what is the current price of Hubbard's common stock?

Carlysle Corporation has perpetual preferred stock outstanding that pays a constant annual dividend of $1.30 at the end of each year. If investors require an 6% return on the preferred stock, what is the price of the firm's perpetual preferred stock?

Assume today is December 31, 2013. Imagine Works Inc. just paid a dividend of $1.30 per share at the end of 2013. The dividend is expected to grow at 18% per year for 3 years, after which time it is expected to grow at a constant rate of 6% annually. The company's cost of equity (rs) is 9%. Using the dividend growth model (allowing for nonconstant growth), what should be the price of the company's stock today (December 31, 2013)?

Answer #1

Hubbard stock value = Dividend next period/(required return -
growth rate)

=1.20*1.02/(0.12-0.02)

=$12.24

Carlysle

Preferred value = Cash flow/required return

=1.30/0.06

=$21.67

Year | Div | ||||

1 | $ 1.534 | $ 1.534 | 0.917431 | $ 1.407 | |

2 | $ 1.810 | $ 1.810 | 0.84168 | $ 1.524 | |

3 | $ 2.136 | $ 75.470 | $ 77.606 | 0.772183 | $ 59.926 |

4 | $ 2.264 | $ 2.264 | |||

Share price0 | $ 62.86 |

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