KeyCh7homework - Key Chapter 7 homework 5. The Spinnaker...

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Key Chapter 7 homework 5. The Spinnaker Company has paid an annual dividend of $2 per share for some time. Recently, however, the board of directors voted to grow the dividend by 6% from now on. What is the most you would be willing to pay for a share of Spinnaker if you expect a 10% return on your stock investments? SOLUTION: Apply the Gordon Model P 0 = D 0 (1 + g) / (k – g) = $2(1.06) / (.10 - .06) = $2.12 / .04 = $53.00 6. The Pancake Corporation recently paid a $3 dividend, and is expected to grow at 5% forever. Investors generally require an expected return of at least 9% before they'll buy stocks similar to Pancake. a. What is Pancake's intrinsic value? b. Is it a bargain if it's selling at $76 a share? SOLUTION: a. 75 . 78 $ 05 . 09 . ) 05 . 1 ( 00 . 3 $ g k ) g 1 ( 0 D P 0 = - = - + = b. That's not apparent. Although our calculated intrinsic price exceeds the market price, it only does so by about 4%. The modeling technique isn't accurate enough to identify 4% differences. Our result says that the stock has probably been priced about right by the market. 9. Cavanaugh Construction specializes in designing and building custom homes. Business has been excellent, and Cavanaugh projects a 10% growth rate for the foreseeable future.
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This note was uploaded on 01/05/2012 for the course 101 melissa jo taught by Professor Acc101 during the Spring '11 term at Aarhus Universitet.

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KeyCh7homework - Key Chapter 7 homework 5. The Spinnaker...

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