Dte wed 34 Common and Preferred Stocks Valuation Exercises: Question 1. Boston C

Question

Dte wed 34 Common and Preferred Stocks Valuation Exercises: Question 1. Boston Company has just paid dividends of $3 per share, which the company projects will grow at a constant rate of 4 percent forever. If Boston Company's shareholders require 12 percent rate of return, what is the price of its common stock? Question 2. You plan to buy Bulldog Corporation' stock. You predict that Bulldog will pay dividends of $2 in year 1 and $3 in year 2, respectively. You are also confident that you can sell the stock for $80 per share at the end of year 2. If you require a 10 percent return on the stock, what is its fair price from your perspective? Question 3, Company BMI will experience a supernormal growth rate of 20% in the next two years. The growth rate will then level off to 4% from year 3 and beyond. The most recent dividend payment was $1.00 and the required rate of return for XYZ stock is 10%. What is the intrinsic value of the BMI stock? Question 4. Beverly Company will pay a dividend of $2 per share next year, which will continue to grow at a constant rate forever. Current stock price is $25 and the required rate of return is 15 percent. What is the constant dividend growth rate? Question 5. BFI Corporation has a preferred stock issue outstanding, which carries a par value of $100 and a fixed dividend rate of 10 percent. If the market requires a rate of return of 8 percent to hold this preferred stock, what is its market price today?

Explanation / Answer

1)Price of stock =D0(1+g)/(Rs-g)

           = 3(1+.04)/(.12-.04)

            = 3*1.04 / .08

             = $ 39 per share

2)Fair price =[PVF@10%,1*D1]+[PVF10%,2*D2]+[PVF10%,2*Fair price at year2]

   =[ .90909*2]+[.82645*3]+[.82645*80]

=1.82+ 2.48+ 6.61

= $ 70.41 per share

3)D1=1(1+.20)=1.2

D2=1.2(1+.20)= 1.44

Terminal value at year 2 =D2(1+g)/(Rs-g)

         = 1.44(1+.04)/(.10-.04)

          = 1.44*1.04 / .06

        = $ 24.96

Intrinsic value = [PVF@10%,1*D1]+[PVF10%,2*D2]+[PVF10%,2*Terminalvalue at year2]

      =[ .90909*1.2]+[.82645*1.44]+[.82645*24.96]

    = 1.09+ 1.19+ 20.63

    = $ 22.91

4)Price = D1/(Rs-g)

      25=2/(.15-g)

      (.15-g)= 2/25

        g= .15- .08

            = .006 or 6%

5)dividend per share= 100*10%= 10

Price =dividend /market rate

    = 10/.08

      = $ 125 per share

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