HW: Chapter 9 PT 1
VIII. Questions and Problems
Basic
9.1. Present Value of Dividends: Fresno Corp is a fast growing company. The company
expects to grow at a rate of 30 percent over the next 2 years, and then slow down to a
growth rate of 18 percent for the following 3 years. If the last dividend paid by the
company was $2.15, estimate the dividends for the next 5 years. Compute the present
value of these dividends if the required rate of return was 14 percent.
Solution:
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D0=$2.15 g1-2 = 30%; g3-5 = 18%; kCS = 14%
D1 = D0(1+g1) = $2.15(1.30) = $2.795
D2 = D1(1+g2) = $2.795(1.30) = $3.634
D3 = D2(1+g3) = $3.634(1.18) = $4.288
D4 = D3(1+g4) = $4.288(1.18) = $5.06
D5 = D4(1+g5) = $5.06(1.18) = $5.97
9.2. Zero Growth: Nynet Inc. paid a dividend of $4.18 last year. The company does not
expect to increase its dividend for the next several years. If the required rate of return is
18.5 percent, what is the current price of the stock?
Solution:
D0 = $4.18; g = 0; R = 18.5%
9.3. Zero Growth: Knight Supply Corp. has seen no growth for the last several years and
expects the trend to continue. The firm last paid a dividend of $3.56. If you require a rate
of return of 13 percent, what is the current stock price?
Solution:
D0 = $3.56; g = 0; R = 13%
9.4. Zero Growth: Ron Santana is interested in buying the stock of First National Bank.
While the bank expects no growth in the near future, Ron is attracted by the dividend
income. Last year, the bank paid a dividend of $5.65. If Ron Santana requires a return of
14 percent on such stocks, what is the maximum price he should be willing to pay?
Solution:
D0 = $5.65; g = 0; R = 14%
9.5. Zero Growth: The current stock price of Largent Inc. is $44.72. If the required rate of
return is 19 percent, what is the dividend paid by this firm which is not expected to grow
in the near future?
Solution:
P0 = $44.72; R = 19%; D = ?;
9.6. Constant Growth: Moriband Corp. just declared a dividend of $2.15 yesterday. The
company is expected to grow at a steady rate of 5 percent for the next several years. If
stocks such as these require a rate of return of 15 percent, what should be the market
value of this stock?
Solution:
D0 = $2.15; g = 5%; R = 15%
9.7. Constant Growth: Nyeil Inc. is a consumer products firm growing at a constant rate of
6.5 percent. The firm’s last dividend was $3.36. If the required rate of return was 18
percent, what is the market value of this stock?
Solution:
D0 = $3.36; g = 6.5%; R = 18%
9.8. Constant Growth: Reco Corp. is expected to pay a dividend of $2.25 next year. The
forecast for the stock price a year from now is $37.50. If the required rate of return is 14
percent, what is the current stock price? Assume constant growth.
Solution:
D1 = $2.25; P1 = $37.50; R = 14%
9.9. Constant Growth: Proxicam Inc. is expected to grow at a constant rate of 7 percent. If
the company’s next dividend is $1.15 and its current price is $22.35, what is the required
rate of return on this stock?
Solution:
D1 = $1.15; P0 = $23.00; g = 7%
9.10. Preferred Stock Valuation: X-Centric Energy Company has issued perpetual preferred
stock with a par of $100 and a dividend of 4.5 percent. If the required rate of return is
8.25 percent, what is the stock’s current market price?
Solution:
D = 4.5% ($100) = $4.50; R = 8.25%
9.11. Preferred Stock Valuation: The First Bank of Ellicott City has issued perpetual
preferred stock with a $100 par value. The bank pays a quarterly dividend of $1.65 on
this stock. What is the current price of this preferred stock given a required rate of return
of 11.6 percent?
Solution:
Quarterly dividend = $1.65
Required rate of return = R = 11.6%
9.12. Preferred Stock: The preferred stock of Axim Corp. is selling currently at $47.13. If
your required rate of return is 12.2 percent, what is the dividend paid by this stock?
Solution:
P0 = $47.13; R = 12.2%
9.13. Preferred Stock: Each quarter, Sirkota Inc. pays a dividend on its perpetual preferred
stock. Today, the stock is selling at $63.37. If the required rate of return for such stocks is
15.5 percent, what is the quarterly dividend paid by this firm?
Solution:
P0 = $63.37; R = 15.5%
Annual Dividend = $9.82
Quarterly Dividend = $9.82 /4 = $2.46
Intermediate
9.14. Constant Growth: Kay Williams is interested in purchasing the common stock of
Reckers Inc., which is currently priced at $37.45. The company expects to pay a dividend
of $2.58 next year and expects to grow at a constant rate of 7 percent.
a. What should the market value of the stock be if the required rate of return is 14 percent?
Solution:
b. Is this a good buy?
The stock is overpriced and not a good buy.
9.15. Constant Growth: Your required rate of return is 23 percent. Ninex Corp. has just paid a
dividend of $3.12 and expects to grow at a constant rate of 5 percent. What is the
expected price of the stock 3 years from now?
Solution:
R=23%; D0=$3.12; g=5%
9.16. Constant Growth: Jenny Banks is interested in buying the stock of Fervan Inc., which is
growing at a constant rate of 6 percent. Last year, the firm paid a dividend of $2.65. Her
required rate of return is 16 percent. What is the current price for this stock? What would
be the price of the stock in year 5?
Solution:
g = 6%, D0 = $2.65, R = 16%
9.17. Non-Constant Growth: Tre-Bien Inc. is a fast growing technology company. The firm
projects a rapid growth of 30 percent for the next 2 years, then a growth rate of 17
percent for the following two years. After that, the firm expects a constant growth rate of
8 percent. The firm expects to pay its first dividend of $2.45 a year from now. If your
required rate of return on such stocks is 22 percent, what is the current price of the stock?
Solution:
g1 = g2 = 30%, g3 = g4 = 17%, g = 8%, D1 = $2.45, R = 22%
D1 = $2.45, D2 = $2.45(1.30) = $3.19, D3 = $3.19(1.17) = $3.73
D4 = $3.73(1.17) = $4.36, D5 = 4.36(1.08) = $4.71
9.18. Non-Constant Growth: ProCor, a biotech firm has forecast the following growth rates
for the next 3 years: 35 percent, 28 percent, and 22 percent. The company then expects to
grow at a constant rate of 9 percent for the next several years. The company paid a
dividend of $1.75 last week. If the required rate of return is 20 percent, what is the market
value of this stock?
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