2. Calvin Inc. earned $2.00 per share during the past ycar and has just paid a d
ID: 2780805 • Letter: 2
Question
2. Calvin Inc. earned $2.00 per share during the past ycar and has just paid a dividend of s.40 per share. Investors forecast that Calvin will continue to rctain 80 percent of its earnings for the next 4 years and that carnings will grow at 25 percent per year through ycar 5. The dividend payout ratio is expected to be raised in year 5 to 50 percent, reducing the dividend growth rate to 8 percent thereafter. IfCalvin's equity is .9, the and the market risk premium is 8 percent, what should its price be today? riskfree ate is 2.5 percent,Explanation / Answer
required return on equity = risk free rate+(market risk premium)*beta
8.5+(8)*.9
15.7
year
earning = previous year earning*(1+growth rate)
dividend = 20% of earning
0
2
1
2.5
0.5
2
3.125
0.625
3
3.90625
0.78125
4
4.882813
0.976563
5
6.103516
3.051758
6
6.591797
3.295898
value of stock = expected dividend/(required rate of return- growth rate)
3.295/(15.7%-8%)
42.79
Year
cash flow
present value of cash flow = cash flow /(1+r)^n r=15.7%
1
0.5
0.432152
2
0.625
0.466889
3
0.78125
0.504417
4
0.976563
0.544962
5
3.051758
1.471917
5
42.79221
20.63944
present value of stock
24.06
required return on equity = risk free rate+(market risk premium)*beta
8.5+(8)*.9
15.7
year
earning = previous year earning*(1+growth rate)
dividend = 20% of earning
0
2
1
2.5
0.5
2
3.125
0.625
3
3.90625
0.78125
4
4.882813
0.976563
5
6.103516
3.051758
6
6.591797
3.295898
value of stock = expected dividend/(required rate of return- growth rate)
3.295/(15.7%-8%)
42.79
Year
cash flow
present value of cash flow = cash flow /(1+r)^n r=15.7%
1
0.5
0.432152
2
0.625
0.466889
3
0.78125
0.504417
4
0.976563
0.544962
5
3.051758
1.471917
5
42.79221
20.63944
present value of stock
24.06
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