I really need some help with my homework. Can someone help me???? problems 1, 2, 4, 6, 9, & 11 on text pp. 296-297 of Ch. 9.
(1.) General Cereal common stock dividends have been growing at an annual rate of 7 percent per year over the past10 years. Current dividend (D0) is $1.70 per share. What is the current value of a share of this stock to an investor who requires a 12% rate of return if the following conditions exist?
(a) Dividends are expected to continue growing at the historic rate for the foreseeable future.
Use the dividend discount model to calculate the current value
Current Value = D1/(Ke-g)
Where
D1 is the expected dividend = D0 X (1+g)
Ke = cost of equity
g = growth rate
D1 = 1.70 X (1+7%) = 1.819
Ke = 12%
g = 7%
Current Value =1.819/(12%-7%) = $36.38
(b) The dividend growth rate is expected to increase to 9% per year.
Current Value = D1/(Ke-g)
D1 = 1.70 X (1+9%) = 1.853
Ke = 12%
g = 9%
Current Value =1.853/(12%-9%) = $61.77
(c.) The dividend growth rate is expected to decrease to 6.5% per year.
Current Value = D1/(Ke-g)
D1 = 1.70 X (1+6.5%) = 1.810
Ke = 12%
g = 6.5%
Current Value =1.810/(12%-6.5%) = $32.92
(2) The Foreman Company's earnings and common stock dividends have been growing at an annual rate of 6% over the past 10 years and are expected to continue growing at this rate for the foreseeable future. The firm currently (D0) pays an annual dividend of $5 per share. Determine the current value of a share of Foreman common stock to investors with each of the following required rates of return:
(a) 12%
Current Value = D1/(Ke-g)
D1 = 5.00 X (1+6%) = 5.30
Ke = 12%
g = 6%
Current Value =5.30/(12%-6%) = $88.33
(b) 14%
Current Value = D1/(Ke-g)
D1 = 5.00 X (1+6%) = 5.30
Ke = 14%
g = 6%
Current Value =5.30/(14%-6%) = $66.25
(c.) 16%
Current Value = D1/(Ke-g)
D1 = 5.00 X (1+6%) = 5.30
Ke = 16%
g = 6%
Current Value =5.30/(16%-6%) = $53
(d)6%
Current Value = D1/(Ke-g)
D1 = 5.00 X (1+6%) = 5.30
Ke = 6%
g = 6%
Current Value =5.30/(6%-6%) = Infinite
(e)4%
Current Value = D1/(Ke-g)
D1 = 5.00 X (1+6%) = 5.30
Ke = 4%
g = 6%
Current Value =5.30/(4%-6%) = $-265
(4) Over the past 5 years, the dividends of the Gamma Corporation have grown from $0.70 per share to the current level of $1.30 per share (D0). This growth rate is expected to continue for the foreseeable future. What is the value of a share of Gamma Corporation common stock to an investor who requires a 20% return on an investment?
Use the compound interest formula to compute the growth rate
1.30 = 0.70 X (1+rate)^5
The growth rate comes to 13.2%
Current Value = D1/(Ke-g)
D1 = 1.30 X (1+13.2%) = 1.47
Ke = 20%
g = 13.2%
Current Value =1.47/(20%-13.2%) = $21.57
(6.) The chairman of Heller Industries told a meeting of financial analysts that he expects the firm's earnings and dividends to double over the next 6 years. The firm's current (That is, as of year 0) earnings and dividends are $4 and $2 respectively.
a) Estimate the compound annual dividend growth rate over the 6 year period.
Use the compound interest formula to calculate the growth rate
4 = 2 X (1+rate)^6
The annual dividend growth rate comes to 12.2%
b) Assuming the forecasted growth rate in (a) will go on forever, how much is this stock worth today if investors require and 18% rate of return?
Current Value = D1/(Ke-g)
D1 = 2.00 X (1+12.2%) = 2.25
Ke = 18%
g = 12.2%
Current Value =2.25/(18%-12.2%) = $39.01
c) Why might the stock price calculated in (b) not represent an accurate valuation to an investor with an 18% required rate of return?
The growth rate in dividends is very high and may not be sustained indefinitely and may reduce in future. The price calculated is higher than it should be with a lower growth rate.
(9) Calculate the book value per share based on the reported stockholders' equity account for Bridgford Foods in fiscal year ending November 2, 2005:
Shareholders' equity&nbs p;(‘000)
Preferred stock, without par value
Authorized –1,000 shares
Issued and outstanding---none
Common stock, $1.00 par value $10,505
Capital in excess of par value $17,475
Retained earnings$29,355
Total shareholders' equity&nbs p; $57,335
Number of shares = 10,505/1 = 10,505
Book Value per share = Total equity/Number of shares outstanding
Total equity = 10,505+17,475+29,355 = 57,335
Since the par value is $1, number of shares = 10,505/1 = 10,505
Book value per share = 57,335/10,505 = $5.46
(11) The Kummins Engine Company common stock has a beta of 0.9. The current risk-free rate of return is 5% and the market risk premium is 8%.The CEO of the company is quoted in a press release as saying that the firm will pay a dividend of $0.80/ share in the coming year and expects the dividends to grow at a constant rate of 7% for the foreseeable future. Using the constant growth model, what value would you assign to this stock?
Using CAPM,
Required return = Rf + Market risk premium X beta
Required return = 5% + 8%X0.9 = 12.2%
Current Value = D1/(Ke-g)
D1 = 0.80
Ke = 12.2%
g = 7%
Current Value =0.80/(12.2%-7%) = $15.38