Extra class 2
Future stock priceconstant growth
Diff: E
1.
Womack Toy Company’s stock is currently trading at $25 per share.
The stock’s dividend is projected to increase at a constant rate of
7 percent per year.
The required rate of return on the stock, k
s
,
is 10 percent.
What is the expected price of the stock 4 years from
today?
Future stock priceconstant growth
Diff: E
2.
Waters Corporation has a stock price of $20 a share.
The stock’s
yearend dividend is expected to be $2 a share (D
1
= $2.00).
The
stock’s required rate of return is 15 percent and the stock’s
dividend is expected to grow at the same constant rate forever.
What is the expected price of the stock seven years from now?
Nonconstant growth stock
Diff: M
3.
Mack Industries just paid a dividend of $1.00 per share (D
0
=
$1.00). Analysts expect the company’s dividend to grow 20 percent
this year (D
1
= $1.20) and 15 percent next year.
After two years
the dividend is expected to grow at a constant rate of 5 percent.
The required rate of return on the company’s stock is 12 percent.
What should be the company’s current stock price?
Nonconstant growth stock
Diff: M
4.
Holmgren Hotels’ stock has a required return of 11 percent.
The
stock currently does not pay a dividend but it expects to begin
paying a dividend of $1.00 per share starting five years from today
(D
5
= $1.00). Once established the dividend is expected to grow by
25 percent per year for two years, after which time it is expected
to grow at a constant rate of 10 percent per year.
What should be
Holmgren’s stock price today?
Supernormal growth stock
Diff: M
5.
DAA’s stock is selling for $15 per share.
The firm’s income,
assets, and stock price have been growing at an annual 15 percent
rate and are expected to continue to grow at this rate for 3 more
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 Spring '10
 RAYMOND
 Price per share

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