ch 8 4. You have found the following stock quote for RJW Enterprises, Inc., in t

Question

ch 8

4.

You have found the following stock quote for RJW Enterprises, Inc., in the financial pages of today’s newspaper.

What was the closing price for this stock that appeared in yesterday’s paper? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

If the company currently has 17 million shares of stock outstanding, what was net income for the most recent four quarters? (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567. Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

5.

Storico Co. just paid a dividend of $1.65 per share. The company will increase its dividend by 24 percent next year and will then reduce its dividend growth rate by 6 percentage points per year until it reaches the industry average of 6 percent dividend growth, after which the company will keep a constant growth rate forever. If the stock price is $42.54, what required return must investors be demanding on Storico stock? (Hint: Set up the valuation formula with all the relevant cash flows, and use trial and error to find the unknown rate of return.) (Do not round intermediate calculations and round your final answer to 1 decimal place. (e.g., 32.16))

52-WEEK YLD VOL NET HI LO STOCK (DIV) % PE 100s CLOSE CHG 73.08 53.92 RJW 1.40 2.5 15 18,027 ?? 0.20

Explanation / Answer

Solution-4

Annual dividend paid to stockholders = $1.40

Dividend yield = 2.5%

Dividend yield = Dividend /Stock Price = D1 / P0

2.5% = $1.40 / P0

P0 = $1.40 / 0.025

Current Price (P0) =$56

Yesterday Closing Price = $56 + $0.20

Yesterday Closing Price = $56.20

Now we use the PE ratio to solve for the Earning per share as follow:

PE Ratio = 15 = Stock Price per share / Earning per share = $56 /EPS

So,

EPS = $56 / 15 = $3.74

EPS = $3.74 = Net Income /Shares Out = Net Income / 17,000,000 Shares

Net Income = $3.74*17,000,000

Net Income = $63,580,000

Solution-5

D1 = $1.65 * 1.24 = $2.046

D2 = $2.046 * 1.18 = $2.415

D3 = $2.415 * 1.12 = $2.7048

D4 = $2.7048 * 1.06 = $2.86708

Let required return be r.

Price in year 3 (P3) = D4 / (r-growth rate) = $2.86708 / (r-6%)

Current stock price = D1 / (1+r) + D2 / (1+r)2 + D3 / (1+r)3 + P3 / (1+r)3

$42.54 = $2.046 / (1+r) + $2.415 / (1+r)2 + $2.7048 / (1+r)3 + $2.8670 / (r-6%) / (1+r)3

Using Traila and Error Method.....

Required return = 8% (Approx)

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