Advanced Managerial Finance – Fin 431
Homework # 5 – Stock Valuation
Answer Sheet
1. Parkside Industries has just paid a dividend of $2.00 per share. If the dividend is expected to
grow at 6% and investors require a 12% return, what is the price of the stock?
P
0
= D
1
/r
s
– g = 2.12/.12  .06 = 35.33
2. Lakeside Aviation just paid a dividend of $2.20. Their growth rate is expected to be 10% for
one year, after which dividends are expected to grow at a rate of 6% forever. The company’s
required rate of return is 11%. What is the current price of the stock?
0
1
2
Dividend
2.20
2.42
2.57
PV
2.18
P
1
= D
2
/r
s
– g = 2.57/.11  .06 = 2.57/.05 = 51.40
PV
46.31
Total PVs = 2.18 + 46.31 = 48.49
3. Great Lakes Boats is expected to pay no dividends for the first three years. The dividend for
year four is expected to be $5.00. Thereafter, it is anticipated that the dividend will grow at a
constant rate of 8% a year. The riskfree rate is 4%, the market risk premium is 6%, and the
stock’s beta is 1.5. What is the estimated current price of the stock?
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 Spring '08
 Stegman,P
 Corporate Finance, Personal Finance, Stock Valuation, Valuation, Gordon model

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