Question

A) Hubbard Industries just paid a common dividend, D0, of $2.00. It expects to grow at a constant rate of 4% per year. If investors require a 9% return on equity, what is the current price of Hubbard's common stock? Do not round intermediate calculations. Round your answer to the nearest cent.

B) Carlysle Corporation has perpetual preferred stock outstanding that pays a constant annual dividend of $1.20 at the end of each year. If investors require an 7% return on the preferred stock, what is the price of the firm's perpetual preferred stock? Do not round intermediate calculations. Round your answer to the nearest cent.

C) Assume today is December 31, 2018. Imagine Works Inc. just paid a dividend of $1.40 per share at the end of 2018. The dividend is expected to grow at 15% per year for 3 years, after which time it is expected to grow at a constant rate of 5.5% annually. The company's cost of equity (rs) is 10%. Using the dividend growth model (allowing for nonconstant growth), what should be the price of the company's stock today (December 31, 2018)? Do not round intermediate calculations. Round your answer to the nearest cent.

Answer 1

a.Current price=D1/(Required return-Growth rate)

(2*1.04)/(0.09-0.04)

=$41.60

b.Price of preferred stock=Annual dividend/required return

=(1.2/0.07)

=$17.14(Approx).

c.

D1=(1.4*1.15)=$1.61

D2=(1.61*1.15)=$1.8515

D3=(1.8515*1.15)=$2.129225

Value after year 3=(D3*Growth rate)/(Cost of equity-Growth rate)

=(2.129225*1.055)/(01-0.055)

=$49.91849722

Hence current price=Future dividends*Present value of discounting factor(10%,time period)

=$1.61/1.1+$1.8515/1.1^2+$2.129225/1.1^3+$49.91849722/1.1^3

which is equal to

$42.10(Approx).