Fin431HW05Key - Advanced Managerial Finance Fin 431...

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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 risk-free 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? First, you must compute the required return to be used in the dividend growth model. r
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This note was uploaded on 11/14/2010 for the course FIN 234 taught by Professor Stegman,p during the Spring '08 term at University of Wisconsin–Parkside.

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Fin431HW05Key - Advanced Managerial Finance Fin 431...

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