discussion

Make sure they work it out or do a it in excel graph 

1. Small Oil can grow at 5% per year for the indefinite future. It’s selling at $100, and next year’s dividend is $5. What is the expected rate of return from investing in the company’s stock?

 

2. Suppose that E&P Inc. just paid a dividend of $0.92 a share, and investors were optimistic about the prospects for the company and were forecasting the earnings to grow over the next 5 years by 10.9% a year. As this was a      very high growth rate, investors did not expect it to continue forever and they expected it to grow at a rate of 3.36% afterward forever. Suppose further that the required return for the investors is 5.6%.

a. Calculate what the market price of the company’s stock is.

b. Suppose somehow the market had a revision of the growth rate from 6 years on to 4%. What would happen to the company’s stock price?

 

3. Large Oil Co. pays out all of its earnings, $5 per share, to investors.

a. What is the value of the stock if the required rate of return us 12%?

b. Suppose the company’s management is now investing at an expected return on equity of 10%, which is below the return of 12% that investors could be expected to get from comparative securities. Assume a 60% payout ratio, find the sustainable growth rate dividends and earnings in these circumstances.

c. Fine the new value of its investment opportunities. Explain why this value is negative despite the positive growth rate of earnings and dividends.

d. If you were a corporate raider, would the company be a good candidate for an attempted takeover?