BLUE, Inc., an all-equity firm, will have earnings per share next year of $4. The company...

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BLUE, Inc., an all-equity firm, will have earnings per share next year of $4. The company pays 40% of its earnings as dividends. The expected growth rate of future earnings is 12%. The company's required rate of return is 16%. (a) (4 Points) Compute the current stock price of BLUE, Inc, and the prospective dividend yield (D1/P0). (b) (4 Points) The management at BLUE Inc. has decided to adopt a drastic change to the company's operations, which will in turn alter their dividend payments. Specifically, they now expect to pay dividends of $3. $5, and $7 dollars for the next three years, after which the dividend is expected to grow at 8% in perpetuity. As in part (a), assume that the first dividend will be paid exactly one year from today and that the required rate of return on equity is 16%. Compute the company's new stock price based on the revised plan. (c) (4 points) The company has decided to change from annual to bi-annual (ie. every other year) dividend payments after the dividend in year 3 is paid. The first three dividends are as in part (b), $3, $5, and $7 dollars, and the next dividend will be paid in year 5. Compute the annualized dividend growth rate from year 3 onwards necessary to maintain the current stock price (PO) that you found in part (b). (d) (3 points) This section is independent of the previous parts. The company RED Inc. has just announced its most recent earnings of $1 per share. RED Inc. pays out all of its earnings annually as dividends. RED's earnings growth is unfortunately, negative at -10% per year RED's management announces that dividends shall be paid every year for the next ten years. After having made the tenth dividend payment the company will sell its assets immediately and distribute the proceeds as a liquidating dividend of $10 per share. Calculate RED's price per share today assuming that the most recent dividend per share of $1 has just been paid and that shareholders require 10% expected rate of return. Question 4: (Portfolio Analysis, 15 points) You own 100 shares of Mirage stock and 300 shares of Imagine stock Mirage stock is currently trading at $80 per share, while Imagine stock trades at $40. The expected return of Mirage is 15 percent, while that of Imagine is 20 percent. The standard deviation of Mirage is 8 percent, while that of Imagine is 20 percent Mirage Imagine Number of shares you own 100 300 Price $80 $40 Expected return 15% 20 % BLUE, Inc., an all-equity firm, will have earnings per share next year of $4. The company pays 40% of its earnings as dividends. The expected growth rate of future earnings is 12%. The company's required rate of return is 16%. (a) (4 Points) Compute the current stock price of BLUE, Inc, and the prospective dividend yield (D1/P0). (b) (4 Points) The management at BLUE Inc. has decided to adopt a drastic change to the company's operations, which will in turn alter their dividend payments. Specifically, they now expect to pay dividends of $3. $5, and $7 dollars for the next three years, after which the dividend is expected to grow at 8% in perpetuity. As in part (a), assume that the first dividend will be paid exactly one year from today and that the required rate of return on equity is 16%. Compute the company's new stock price based on the revised plan. (c) (4 points) The company has decided to change from annual to bi-annual (ie. every other year) dividend payments after the dividend in year 3 is paid. The first three dividends are as in part (b), $3, $5, and $7 dollars, and the next dividend will be paid in year 5. Compute the annualized dividend growth rate from year 3 onwards necessary to maintain the current stock price (PO) that you found in part (b). (d) (3 points) This section is independent of the previous parts. The company RED Inc. has just announced its most recent earnings of $1 per share. RED Inc. pays out all of its earnings annually as dividends. RED's earnings growth is unfortunately, negative at -10% per year RED's management announces that dividends shall be paid every year for the next ten years. After having made the tenth dividend payment the company will sell its assets immediately and distribute the proceeds as a liquidating dividend of $10 per share. Calculate RED's price per share today assuming that the most recent dividend per share of $1 has just been paid and that shareholders require 10% expected rate of return. Question 4: (Portfolio Analysis, 15 points) You own 100 shares of Mirage stock and 300 shares of Imagine stock Mirage stock is currently trading at $80 per share, while Imagine stock trades at $40. The expected return of Mirage is 15 percent, while that of Imagine is 20 percent. The standard deviation of Mirage is 8 percent, while that of Imagine is 20 percent Mirage Imagine Number of shares you own 100 300 Price $80 $40 Expected return 15% 20 %