ARE143_CHAP_6a

ARE143_CHAP_6a - 1 Managerial Economics(ARE 143 University...

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1 Managerial Economics (ARE) 143 University of California, Davis Instructor: John H. Constantine Chapter 6—Common Stock Valuation Problem 1: World-Tour Co. has just now paid a dividend of \$2.83 per share; the dividends are expected to grow at a constant rate of 6% per year forever. If the required rate of return on the stock is 16%, what is the current value on stock, after paying the dividend? Problem 2: MJ Co. pays out 60% of its earnings as dividends. Its return on equity is 15%. What is the stable dividend growth rate for the firm? Problem 3: The In-Tech Co. has just paid a dividend of \$1 per share. The dividends are expected to grow at 25% per year for the next three years and at the rate of 5% per year thereafter. If the required rate of return on the stock is 18%, what is the current value of the stock? Problem 4: Ocean Co. has paid a dividend \$2 per share out of earnings of \$4 per share. If the book value per share is \$25, what is the expected growth rate in dividends (g)? Problem 5: Universal Air is a no growth firm and has two million shares outstanding. It is expected to earn a constant 20 million per year on its assets. If all earnings are paid out as dividends and the cost of capital is 10%, calculate the current price per share for the stock. Problem 6:

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This note was uploaded on 01/13/2012 for the course ARE 143 taught by Professor Brinkley,g during the Spring '08 term at UC Davis.

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ARE143_CHAP_6a - 1 Managerial Economics(ARE 143 University...

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