Please provide the answers and formulas, preferably through excel. 

 

Question 1

Consider the following three stocks:

a)  Stock A is expected to provide a dividend of $10 a share forever (starting next

year);

b)  Stock B is expected to pay a dividend of $5 next year. Thereafter, dividend

growth is expected to be 4% forever;

c)  Stock C is expected to pay a dividend of $5 next year. Thereafter, dividend

growth is expected to be 20% per year for 5 years (i.e., until year 6) and zero thereafter.

If the appropriate interest rate to discount the cash flows is 10% per year for all stocks, which stock is the most valuable? What if the appropriate interest rate is 7% per year?

 

Question 2

Phoenix Motor Corp was hit by a crisis four years ago and stopped paying dividends. Now, Phoenix Motor Corp. has just announced a $1 per share dividend. Dividends will increase to a "normal level" of $3 when the company completes its recovery over the next three years. After that, dividend growth will settle down to a moderate long-term growth rate of 6%. Assume dividends of $1, $2 and $3 for years 1, 2, 3.

Phoenix stock is selling at $50 per share. Write down an equation from which the interest rate being used to discount Phoenix's future dividends can be solved. If you are able to solve it using a computer (Excel, matlab, etc.), do it! Don't worry if you can't, just provide a guess.

 

Question 3

Longs Drug Stores will pay dividends of $0.56 per share and trade at $45.50 per share at end of one year. Suppose the appropriate interest rate to discount Longs Drug cash flows is 6.80% per year. What is the price of Longs Drug share today?

 

Question 4

Crane Sporting Goods will have earnings per share of $6 for ever. Rather than re-invest these earnings and grow, the firm plans to pay out all its earnings as a dividend. Crane's current share price is $60.

a)  What is the interest rate being used to discount future dividends paid by Crane?

b)  Suppose Crane could cut its dividend pay-out rate to 75% forever, and use the retained earnings to invest in new stores. This investment would cause dividends to increase 3% for ever. Assuming the same interest rate you found in a), what effect would this policy have on Crane's stock price?

Answer rating: 100% (QA)

Here are the solutions to the questions with the formulas and Excel calculations Question 1 a Stock ... View the full answer