9(1) The next dividend payment by ECY, Inc., will be $1.68 per share. The divide

Question

9(1)

The next dividend payment by ECY, Inc., will be $1.68 per share. The dividends are anticipated to maintain a growth rate of 6 percent, forever. ECY stock currently sells for $32 per share.

What is the dividend yield? (Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16))

9(2)

White Wedding Corporation will pay a $2.94 per share dividend next year. The company pledges to increase its dividend by 4.5 percent per year, indefinitely. If you require a return of 12 percent on your investment, how much will you pay for the company’s stock today? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

  Stock price

9(3)

Suppose you know that a company’s stock currently sells for $68 per share and the required return on the stock is 11 percent. You also know that the total return on the stock is evenly divided between a capital gains yield and a dividend yield. It's the company’s policy to always maintain a constant growth rate in its dividends.

9(4)

Gruber Corp. pays a constant $9.50 dividend on its stock. The company will maintain this dividend for the next 11 years and will then cease paying dividends forever. The required return on this stock is 11 percent.

9(5)

The newspaper reported last week that Bennington Enterprises earned $34.09 million this year. The report also stated that the firm’s return on equity is 18 percent. Bennington retains 70 percent of its earnings.

9(6)

Hughes Co. is growing quickly. Dividends are expected to grow at a rate of 26 percent for the next three years, with the growth rate falling off to a constant 8 percent thereafter. If the required return is 15 percent and the company just paid a $3.55 dividend, what is the current share price? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

9(7)

Janicek Corp. is experiencing rapid growth. Dividends are expected to grow at 30 percent per year during the next three years, 20 percent over the following year, and then 5 percent per year indefinitely. The required return on this stock is 12 percent, and the stock currently sells for $92 per share. What is the projected dividend for the coming year? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

The next dividend payment by ECY, Inc., will be $1.68 per share. The dividends are anticipated to maintain a growth rate of 6 percent, forever. ECY stock currently sells for $32 per share.

Explanation / Answer

(1) Dividend = $1.68 per share

Growth rate = 6%

Stock Price = $32

Dividend Yield = Dividend Per Share / Price per share

= 1.68 / 32 = 5.25%

The capital gain yield or percentage increase in the stock price is the same as the dividend growth rate,so :

Capital gains yield = 6.0%

Expected Capital Gains Yield:

= Dividend Yield + Capital Gains Yield

= 5.25% + 6.0% = 11.255

(2) Dividend = $2.94 per share

Growth = 4.5%

r = 12%

Stock Price = D1/(R - g) = D0 * (1+g) / (R - g)

= $2.94*1.045 / (0.12 - 0.045)

= $3.07 / 0.075 = $41.00

(3) Dividend Yield = 1/2*(0.11) = 0.055 =Capital Gain Yield

D1 = 0.055*$68 = $3.74

D1 = D0 (1+g)

$3.74 = D0 (1+.055)

D0 = $3.74 / 1.055 = $3.55

(4) The PV factor of an ordinary annuity for 11 years with the dividend payments made at the end of the year is 6.2065

Therefore, the value of the stock is $9.50 * 6.2065 = $58.96

(6) D1 = 3.55 (1 + .26) = $4.473

D2= 4.473 (1 + .26) = $5.636

D3= 5.636 (1 + .26) = $7.101

D4= 7.101 (1 + .08) = $7.67

P0 = 4.473/(1.15) + 5.636/(1.15)2 + 7.101/(1.15)3 + 7.67/(0.15 - 0.08)*(1.15)-3

= $84.86

(7) $92 = D0*(1.30/1.12+1.302/1.122 +1.303/1.123 + 1.303 * 1.20/1.124 + 1.303 * 1.20*1.05/1.125 (0.12-0.05)

D0 = $3.26

x = 3.02

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