2. A firm does not pay a dividend. It is expected to pay its first dividend of $
ID: 2632793 • Letter: 2
Question
2. A firm does not pay a dividend. It is expected to pay its first dividend of $0.12 per share in three years. This dividend will grow at 9 percent indefinitely. Use a 10 percent discount rate.
Compute the value of this stock. (Round your answer to 2 decimal places.)
stock value=
3. New York Times Co. (NYT) recently earned a profit of $1.91 per share and has a P/E ratio of 19.55. The dividend has been growing at a 8.50 percent rate over the past six years.
If this growth rate continues, what would be the stock price in four years if the P/E ratio remained unchanged? What would the price be if the P/E ratio increased to 24 in 5 years? (Round your answers to 2 decimal places.)
Stock price=
stock price with new p/e=
4. Consider a firm that had been priced using a 12 percent growth rate and a 14 percent required return. The firm recently paid a $1.90 dividend. The firm just announced that because of a new joint venture, it will likely grow at a 12.5 percent rate.
How much should the stock price change (in dollars and percentage)? (Round your answers to 2 decimal places.)
Change in stock price=
change in stock percent=
Explanation / Answer
2. Price in 2 years = dividend / (required return - growth rate) = 0.12 / (10% - 9%) = 12
Current price = price in 2 years / (1+required return)^2 = 12 / (1+10%)^2 = 9.92
Answer: Stock price = $ 9.92
3. Profit in 4 years = 1.91 * (1+8.5%)^4 = 2.65
Price in 4 years = profit * PE ratio = 2.65 * 19.55 = 51.75
If PE ratio = 24, then price in 5 years = 1.91 * (1+8.5%)^5 * 24 = 68.93
Answer: Stock price = $ 51.75 and stock price with new 24 PE = 68.93
4. Next year dividend = 1.9 * (1+12%) = 2.128
Old stock price = next year dividend / (required return - growth rate) = 2.128 / (14%-12%) = 106.4
New next year dividend = 1.9 * (1+12.5%) = 2.1375
New stock price = next year dividend / (required return - growth rate) = 2.1375 / (14%-12.5%) = 142.5
Change in stock price = 142.5 - 106.4 = 36.1
Change in stock % = 36.1 / 106.4 = 33.93%
Answer: Change in stock price = $ 36.2 and change in stock price = 33.93%
Hope this helped ! Let me know in case of any queries.
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