1. Bui Corp. pays a constant $13.10 dividend on its stock. The company will main
ID: 2773391 • Letter: 1
Question
1. Bui Corp. pays a constant $13.10 dividend on its stock. The company will maintain this dividend for the next nine years and will then cease paying dividends forever.
If the required return on this stock is 11 percent, what is the current share price?
2. Rabie, Inc., has an issue of preferred stock outstanding that pays a $6.10 dividend every year, in perpetuity
If this issue currently sells for $80.65 per share, what is the required return
3. Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on the stock over the next seven years, because the firm needs to plow back its earnings to fuel growth. The company will then pay a dividend of $15.50 per share 8 years from today and will increase the dividend by 6.00 percent per year thereafter.
If the required return on this stock is 14.00 percent, what is the current share price?
4. Apocalyptica Corporation is expected to pay the following dividends over the next four years: $6.80, $17.80, $22.80, and $4.60. Afterwards, the company pledges to maintain a constant 5.75 percent growth rate in dividends, forever.
If the required return on the stock is 8 percent, what is the current share price?
Explanation / Answer
Answer-1:
Calculation of current share price:
Current share price = Present value of future dividends
= Dividend Per year * PVF (Required rate %, Years )
= $13.10 *5.537048
= $72.54
Answer-2:
Calculation of Required rate of return on preferred stock :
Required rate = Perpetual Dividend / Current Price
= 6.10 / 80.65
= 0.0756
= 7.56%
Answer-3:
Calculation of current share price
Year
Cash Flows (CF)
PVF
PV = CF *PVF
Annual Dividend (For first 7 years)
1 to 7
$ -
4.28830
$ -
Annual Dividend (in 8th year)
8
$ 15.50
0.35056
$ 5.43
Terminal Value at the end of year 8
= Year 9 Dividend / (Required rate - Growth rate )
= (15.5*106%) / (14%-6%)
8
$ 205.38
0.35056
$ 72.00
Current share price = Sum of PV
$ 77.43
Answer-4:
Calculation of current share price
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Dividend
$ 6.8000
$ 17.8000
$ 22.8000
$ 4.6000
$ 4.8645
(4.60*105.75%)
Terminal Value at the end of year 4
$ 216.2000
= Year 5 Dividend / (Required rate - Growth rate )
4.8645 / (8%-5.75%)
Total Cash Flows (CF)
$ -
$ 6.8000
$ 17.8000
$ 22.8000
$ 220.8000
PVF (8%)
1.00000
0.92593
0.85734
0.79383
0.73503
PV = CF *PVF
$ -
$ 6.30
$ 15.26
$ 18.10
$ 162.29
Current share price = Sum of PV
$ 201.95
Answer-3:
Calculation of current share price
Year
Cash Flows (CF)
PVF
PV = CF *PVF
Annual Dividend (For first 7 years)
1 to 7
$ -
4.28830
$ -
Annual Dividend (in 8th year)
8
$ 15.50
0.35056
$ 5.43
Terminal Value at the end of year 8
= Year 9 Dividend / (Required rate - Growth rate )
= (15.5*106%) / (14%-6%)
8
$ 205.38
0.35056
$ 72.00
Current share price = Sum of PV
$ 77.43
Answer-4:
Calculation of current share price
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Dividend
$ 6.8000
$ 17.8000
$ 22.8000
$ 4.6000
$ 4.8645
(4.60*105.75%)
Terminal Value at the end of year 4
$ 216.2000
= Year 5 Dividend / (Required rate - Growth rate )
4.8645 / (8%-5.75%)
Total Cash Flows (CF)
$ -
$ 6.8000
$ 17.8000
$ 22.8000
$ 220.8000
PVF (8%)
1.00000
0.92593
0.85734
0.79383
0.73503
PV = CF *PVF
$ -
$ 6.30
$ 15.26
$ 18.10
$ 162.29
Current share price = Sum of PV
$ 201.95
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