A company currently pays a dividend of $3.75 per share (D0 = $3.75). It is estim

Question

A company currently pays a dividend of $3.75 per share (D0 = $3.75). It is estimated that the company's dividend will grow at a rate of 21% per year for the next 2 years, then at a constant rate of 7% thereafter. The company's stock has a beta of 1.05, the risk-free rate is 8%, and the market risk premium is 4%. What is your estimate of the stock's current price? Round your answer to the nearest cent.

EMC Corporation has never paid a dividend. Its current free cash flow of $370,000 is expected to grow at a constant rate of 4.7%. The weighted average cost of capital is WACC = 11.75%. Calculate EMC's estimated value of operations. Round your answer to the nearest dollar.

A stock is trading at $80 per share. The stock is expected to have a year-end dividend of $3 per share (D1 = $3), and it is expected to grow at some constant rate g throughout time. The stock's required rate of return is 11% (assume the market is in equilibrium with the required return equal to the expected return). What is your forecast of g? Round the answer to three decimal places.

Explanation / Answer

D1=3.75*1.21 4.54 D2=4.54*1.21 5.49 D3=5.49*1.07 5.87 Cost of capital=RF+Beta*(Market Premium)=8+1.05*4 12.2 Price of Bond=PV of D1 & D2+ PV of growing perpetuity=1.21/(1.122)+5.49/(1.122^2)+5.87/(0.122-0.07) 118.32 Estimated Value of Operations=Present value of perpetuity=A/(i-g)=370000/(0.1175-0.047) 5248227 D1=3 g=? r=11% P=80 P=D1/(r-g) or 80=3/(0.11-g) or 80*0.11-80g=3 or -80g=3-8.8=-5.8 or g=5.8/80=0.0725 7.25%

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