Auld Inc. is in a declining industry. Sales, earnings, and dividends are all decreasing at a rate of 5% per year. Investors have a required return of 12% and the next dividend is expected to be $8.50.

a) What is the value of a share?

b) What price do you forecast for the stock next year?

c) Calculate the dividend yield and the capital gain (loss) yield.

2. EZSpin recently paid a dividend of $7.77 per share. Dividends are growing at a rate of 6% per year and the required return is 9%.

a) What is the current share price?

b) EZSpin has the opportunity to purchase a new piece of equipment that will dramatically increase production. To pay for the equipment, they would need to cut their dividend next year to $6.70. Growth will increase to 8% however due to increased production for 2 years then level off to a constant rate of 7%. The required return will remain at 9%. As a shareholder of EZSpin, would you be in favour of the purchase of the new equipment? Why or why not? Show your work.

Answer rating: 100% (QA)

1 Auld Inc a Using the constant growth formula D1 850 given g 5 declining at 5 annual... View the full answer