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FAU FIN 3403 Supernormal Growth Problems - The Music Hut...

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The Music Hut just paid an annual dividend of $1.05 a share. The projected dividends for thenext five years are $1.07, $1.10, $1.15, $1.20, and $1.25, respectively. After that time, thedividends will be held constant at $1.40 per share. What is this stock worth today at a 12.5percent discount rate?
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Cellular Talk is a new firm in a rapidly growing industry. The company is planning on increasingits annual dividend by 25 percent a year for the next three years and then decreasing the growth
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Unformatted text preview: rate to 6 percent per year. The company just paid its annual dividend in the amount of $0.80 per share. What is the current value of one share of this stock if the required rate of return is 17 percent? *** This is supernormal or differing rates of growth model, so you increase the 80 cent dividend for three years then use the constant growth model when it changes: d1=.80(1.25)=1, d2=d1(1.25)=1(1.25)=1.25, d3=d2(1.25)=1.56, then use constant growth with this dividend to get P3=1.56(1.06)/[.17-.06]=15.03. Now enter these into the uneven CF keys making sure you add the third dividend and P3 together as the third CF: 0 CF 1 CF 1.25 CF 1.56+15.03=16.59 CF I=17 and I get $12.13 *** The common stock of Ruby Janes pays a constant annual dividend. Thus, the market price of Ruby Janes stock will: *** Decrease when the return increases, ie, P=d/r for a constant perpetuity, so when r increases P decreases. *** Selected Answer: increase when the market rate of return increases...
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