FI515_Homework4_LarryBrowning

FI515_Homework4_LarryBrowning - 7-2 Constant Growth...

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7-2 Constant Growth Valuation Boehm Incorporated is expected to pay a \$1.50 per share dividend at the end of the year? The dividend is expected to grow at a constant rate of 7% a year. The required rate of return on the stock is 15%. What is the value per share of the company's stock? 1.50 multiply it by 1 + the 7% growth rate and get 1.5 (1.07) = 1.605 Now, I need to go to part two of the formula. I take what I just got and divide by the required rate of return minus the growth rate: (1.50)(1.07) /(.15 - .07) = 1.605 / .08 = 20.0625 or \$20.63 7-4 Preferred Stock Valuation Nick’s Enchiladas Incorporated has preferred stock outstanding that pays a dividend of \$5 at the end of each year. The preferred sells for \$50 a share. What is the stock’s required rate of return? \$5/\$50 = 10% 7-5 Non-constant Growth Valuation A company currently pays a dividend of \$2 per share, D0 = \$2.00. It is estimated that the company’s dividend will grow at a rate of 20% per year for the next 2 years, and then the dividend will grow at a constant rate of 7% thereafter. The company‘s required

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This note was uploaded on 02/13/2011 for the course FI 515 taught by Professor Watson during the Spring '09 term at Keller Graduate School of Management.

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FI515_Homework4_LarryBrowning - 7-2 Constant Growth...

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