CH 7 Drill 1. Suppose you know that a company’s stock currently sells for $65.30
ID: 2779276 • Letter: C
Question
CH 7 Drill
1. Suppose you know that a company’s stock currently sells for $65.30 per share and the required return on the stock is 9 percent. You also know that the total return on the stock is evenly divided between capital gains yield and dividend yield. If it’s the company’s policy to always maintain a constant growth rate in its dividends, what is the current dividend per share?
2. The Sleeping Flower Co. has earnings of $1.44 per share.
If the benchmark PE for the company is 13, how much will you pay for the stock? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)
If the benchmark PE for the company is 16, how much will you pay for the stock? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)
$
3. Apocalyptica Corporation is expected to pay the following dividends over the next four years: $6.20, $17.20, $22.20, and $4.00. Afterwards, the company pledges to maintain a constant 5.50 percent growth rate in dividends, forever. If the required return on the stock is 9 percent, what is the current share price?
Bui Corp. pays a constant $13.30 dividend on its stock. The company will maintain this dividend for the next seven years and will then cease paying dividends forever. If the required return on this stock is 10 percent, what is the current share price?
2. The Sleeping Flower Co. has earnings of $1.44 per share.
If the benchmark PE for the company is 13, how much will you pay for the stock? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)
Current stock price $If the benchmark PE for the company is 16, how much will you pay for the stock? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)
Current stock price$
Explanation / Answer
1)
Dividend per share = Share price×Required return
= $65.3×9%
= $5.88
2)
Share price = PE×EPS
If PE = 13
Share price:
= 13×$1.44
= $18.72
If PE = 16
Share price:
= 16×$1.44
= $23.04
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