A) Boehm Incorporated is expected to pay a $1.00 per share dividend at the end o

Question

A) Boehm Incorporated is expected to pay a $1.00 per share dividend at the end of this year (i.e., D1 = $1.00). The dividend is expected to grow at a constant rate of 10% a year. The required rate of return on the stock, rs, is 17%. What is the estimated value per share of Boehm's stock? Do not round intermediate calculations. Round your answer to the nearest cent.

B) Woidtke Manufacturing's stock currently sells for $16 a share. The stock just paid a dividend of $1.80 a share (i.e., D0 = $1.80), and the dividend is expected to grow forever at a constant rate of 10% a year. What stock price is expected 1 year from now? Do not round intermediate calculations. Round your answer to the nearest cent.

What is the estimated required rate of return on Woidtke's stock? Do not round intermediate calculations. Round the answer to two decimal places. (Assume the market is in equilibrium with the required return equal to the expected return.)

C) Nick's Enchiladas Incorporated has preferred stock outstanding that pays a dividend of $3 at the end of each year. The preferred sells for $60 a share. What is the stock's required rate of return? (Assume the market is in equilibrium with the required return equal to the expected return.) Round the answer to two decimal places.

Explanation / Answer

a.Current price=D1/(Required return-Growth rate)

=1/(0.17-0.1)

=$14.29(Approx).

b.

a.We use the formula:
A=P(1+r/100)^n
where
A=future value
P=present value
r=rate of interest
n=time period.

Hence P1=$16*(1.1)

=$17.60

b.Required return=(D1/Current price)+Growth rate

=(1.8*1.1)/16+0.1

=22.38%(Approx).

C.

Required rate of return=Annual dividend/Curent price

=(3/60)

which is equal to

=5%

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