PLEASE SHOW ALL WORK FOR FULL CREDIT 1. (common stock valuation, constant growth

Question

PLEASE SHOW ALL WORK FOR FULL CREDIT

1. (common stock valuation, constant growth) You've discovered a company that is expected to pay $2.00 dividend at the end of this year. The dividend is expected to grow forever at a constant rate of 4% a year. The required rate of return for this stock is 10%. Given these conditions, what is the estimated market value per share of this stock?

2. (common stock valuation, non-constant growth) You've discovered a company that is expected to pay $2.00 dividend at the end of this year. You estimate the company's dividends will grow 10% next year and then at a constant rate of 4% thereafter. The required rate of return for this stock is 11%. Given these conditions, what is the estimated market value per share of this stock?

3. (The PE model) Imagine you are estimating the market value of Hunt Oil Company's stock, which is not publicly traded. So you decide to use the PE model for your valuation. You observe the following PE Ratio comparisons for your project:

Company PE Ratio (from the Internet)

a. Exxon-Mobil 9

b. Chevron 10

c. ConocoPhillips 11

a. What is the implied "appropriate" PE for Hunt Oil Company?

b. Assuming Hunt Oil Company's EPS is = $4.10, what is your estimate for the market value of the company's stock?

4. (Preferred stock valuation) You have discovered a company which has issued preferred stock with a stated annual dividend of 8% of its par value of $100. The average yield on preferred stock of this type among other companies is 6%. Given these conditions, what is your estimate of the market value of this company's preferred stock?

Answers

Question 1: $33.33

Question 2: $30.12

Question 3a: 10

Question 3b: $41.00

Question 4: $133

Explanation / Answer

1. Using Dividend Discount Model, Stock price = D1/(required rate of return - growth rate) = 2/(0.1-0.04) = 2/0.06 = $33.33

2. Using 2 - step DDM,
stock price is the sum of D1/(1+required rate) and (D2*/(required rate - growth rate))/(1+required rate)
D2 = 2*(1+growth rate) = 2*1.1 = 2.2
Stock price = 2/1.11 + (2*1.1/(0.11-0.04))/1.11 = 1.802 + 2.2/(0.07*1.11) = 1.802 + 28.314 = $30.12

3. As per PE Model, stock price = Appropriate PE * EPS
Implied appropriate pe is the average of the competitor firms listed on the exchange = (9+10+11)/3 = 10
price = 10* 4.1 = $41

4. Annual dividend = 8% on 100 par value = $8
Required rate of return = average yield of other companies = 6%
Stock price = Annual dividend / required rate = 8/0.06 = $133.33

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