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KeyCh7homework

# 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.

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