#3 Solutions - Stock Valuation

# #3 Solutions - Stock Valuation - UNIVERSITY OF NORTH...

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U NIVERSITY OF N ORTH C AROLINA A T C HAPEL H ILL K ENAN -F LAGLER B USINESS S CHOOL B USI 408: C ORPORATE F INANCE S OLUTIONS TO P RACTICE P ROBLEM SET #3: S TOCK V ALUATION P ROF . A RZU O ZOGUZ 1. Scubaland, Inc., is experiencing a period of rapid growth. Earnings and dividends per share are expected to grow at a rate of 18 percent during the next two years, 15 percent in the third year, and 6 percent thereafter. Yesterday, Scubaland paid a dividend of \$1.15. If the required rate of return on the stock is 12 percent, what is the price of a share of the stock today? Recall that the stock price is the present value of the expected future cash flows, discounted at the appropriate rate of return. () () () () () () () () () () () () () () () () () () () 955 . 26 12 . 1 1 06 . 0 12 . 0 952 . 1 12 . 1 841 . 1 12 . 1 601 . 1 12 . 1 357 . 1 12 . 1 1 06 . 0 12 . 0 06 . 1 15 . 1 18 . 1 15 . 1 12 . 1 15 . 1 18 . 1 15 . 1 12 . 1 18 . 1 15 . 1 12 . 1 18 . 1 15 . 1 1 1 1 1 1 3 3 2 3 2 3 2 2 2 3 4 3 3 2 2 1 0 = × + + + = × + + + = + × + + + + + + = r g r Div r Div r Div r Div P 2. Rite Bite Enterprises sells toothpicks. Gross revenues last year were \$3 million, and total costs were \$1.5 million. Rite Bite has 1 million share of common stock outstanding. Gross revenues and costs are expected to grow at 5 percent per year. Rite Bite pays no income taxes. All earnings are paid out as dividends. a. If the appropriate discount rate is 15 percent, and all cash flows are received at year’s end, what is the price per share of Rite Bite stock? Net earnings after total costs last year were \$3 million

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#3 Solutions - Stock Valuation - UNIVERSITY OF NORTH...

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