$71.68 8. IT&M, Inc., a large conglomerate, has decided to acquire another firm. Analysts are forecasting that there will be a period (2 years) of extraordinary growth (20%) followed by another 2 years of unusual growth (10%), and that finally the previous growth pattern of 6% annually will resume. If the last dividend was $1 per share and the required return is 8%, what should the market price be today? $73.74
22 9. A share of DRV, Inc., stock paid a dividend of $1.50 last year, and the dividend is expected to grow at a constant rate of 4% in the future. The appropriate rate of return on this stock is believed to be 12%. Suppose DRV stock were selling for $25 today. What would be the implied value of k s , assuming the other data remain the same? 10.24 percent 10. The Canning Company has been hit hard due to increased competition. The company's analysts predict that earnings (and dividends) will decline at a rate of 5% annually into the foreseeable future. Assume that k s = 11% and D 0 = $2.00. What will be the price of the company's stock in three years? $10.19 11. IBM is currently selling at $65 per share. Next year's dividend is expected to be $2.60. If investors on this particular day expect a return of 12% on their investment, what do they think IBM's growth rate will be? 12. The MM Company has fallen on hard times. Its management expects to pay no dividends for the next 2 years. However, the dividend for Year 3 (D 3 ) will be $1.00 per share, and it is expected to grow at a rate of 3% in Year 4, 6% in Year 5, and 10% in Year 6 and thereafter. If the required return for MM Co. is 20%, what is the current equilibrium price of the stock? $6.34 13. Your brother-in-law, a stockbroker at Invest, Inc., is trying to sell you a stock with a current market price of $20. The stock had a last dividend (D 0 ) of $2.00 and a constant growth rate of 8%. Your required return on this stock is 20%. From a strict valuation standpoint, you should: Not buy the stock; it is overvalued by $2.00. 14. Negative Limited is expected to grow for four years at a rate of 50 percent. After four years, the product fad is expected to decline, and Negative will grow at a negative growth rate of 5 percent. Negative currently pays a dividend of $1.00 per share and stockholders have a required rate of return of 18 percent. What should be the market value for a share of Negative Limited stock? $18.34 15. Assume the firm has been growing at a 15% annual rate and is expected to continue to do so for 3 more years. At that time, growth is expected to slow to a constant 4% rate. The firm maintains a 30% payout ratio, and this year's retained earnings were $1.4 million. The firm's beta is 1.25, the risk-free rate is 8%, and the market risk premium is 4%. If the market is in equilibrium, what is the market value of the firm's common equity (1 million shares outstanding)? $9.16 million
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