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FI515_Homework4_BrianLin

# FI515_Homework4_BrianLin - Brian Lin D01278742 Week 4...

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Brian Lin D01278742 Week 4 Homework Chapter 7 Questions Question 7-2 Boehm Incorporated is expected to pay a \$1.50 per share dividend at the end of this year (i.e. D 1 = \$1.50). The dividend is expected to grow at a constant rate of 7% a year. The required rate of return on the stock, r s , is 15%. What is the value per share of Boehm’s stock? D 1 = 1.50 P 0 = D 1 /r s -g P 0 = 1.5/15%-7% P 0 = \$18.75 Question 7-4 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? r^ s = D PS /V PS r^ s = 5/50 r^ s = 10% Question 7-5 A company currently pays a dividend of \$2 per share (D 0 = \$2). It is estimated that the company’s dividend will grow at a rate of 20% per year for the next 2 years, then at a constant rate of 7% thereafter. The company’s stock has a beta of 1.2, the risk free rate is 7.5%, and the market risk premium is 4%. What is your estimate of the stock’s current price?

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