Financial management(BSM-410) problem solving 7
9-1 DPS CALCULATION Weston Corporation just paid a dividend of $1.00 a share (i.e., D 0 = $ 1.00 ). The dividend is expected to grow 12% a year for the next 3 years and then at 5% a year thereafter. What is the expected dividend per share for each of the next 5 years? 9-4 NONCONSTANT GROWTH VALUATION Holt Enterprises recently paid a dividend, D 0 , of $2.75. It expects to have nonconstant growth of 18% for 2 years followed by a constant rate of 6% thereafter. The firm’s required return is 12%. A. How far away is the horizon date? B. What is the firm’s horizon, or continuing, value? C. What is the firm’s intrinsic value today, P ^ 0 ? 9-7 PREFERRED STOCK RATE OF RETURN What will be the nominal rate of return on a perpetual preferred stock with a $100 par value, a stated dividend of 10% of par, and a current market price of (a) $61, (b) $90, (c) $100, and (d) $138? 9-17 CONSTANT GROWTH Your broker offers to sell you some shares of Bahnsen & Co. common stock that paid a dividend of $2.00 yesterday. Bahnsen’s dividend is expected to grow at 5% per year for the next 3 years. If you buy the stock, you plan to hold it for 3 years and then sell it. The appropriate discount rate is 12%. A. Find the expected dividend for each of the next 3 years; that is, calculate D 1 , D 2 , and D 3 . Note that D 0 = $ 2.00 . B. Given that the first dividend payment will occur 1 year from now, find the present value of the dividend stream; that is, calculate the PVs of D 1 , D 2 , and D 3 , and then sum these PVs. C. You expect the price of the stock 3 years from now to be $34.73; that is, you expect P ^ 3 to equal $34.73. Discounted at a 12% rate, what is the present value of this expected future stock price? In other words, calculate the PV of $34.73. D. If you plan to buy the stock, hold it for 3 years, and then sell it for $34.73, what is the most you should pay for it today? E. Use Equation 9.2 to calculate the present value of this stock. Assume that g = 5 % and that it is constant. F. Is the value of this stock dependent upon how long you plan to hold it? In other words, if your planned holding period was 2 years or 5 years rather than 3 years, would this affect the value of the stock today, P ^ 0 Explain. 9-18 NONCONSTANT GROWTH STOCK VALUATION Taussig Technologies Corporation (TTC) has been growing at a rate of 20% per year in recent years. This same growth rate is expected to last for another 2 years, then decline to g n = 6 % . A. If D 0 = $ 1.60 and r s = 10 % , what is TTC’s stock worth today? What are its expected dividend, and capital gains yields at this time, that is, during Year 1? B. Now assume that TTC’s period of supernormal growth is to last for 5 years rather than 2 years. How would this affect the price, dividend yield, and capital gains yield? Answer in words only. C. What will TTC’s dividend and capital gains yields be once its period of supernormal growth ends? (Hint: These values will be the same regardless of whether you examine the case of 2 or 5 years of supernormal growth; the calculations are very easy.) 9-22 NONCONSTANT GROWTH AND CORPORATE VALUATION Rework Problem 9-18, parts a, b, and c, using a spreadsheet model. For part b, calculate the price, dividend yield, and capital gains yield as called for in the problem. After completing parts a through c, answer the following additional question, using the spreadsheet model: D. TTC recently introduced a new line of products that has been wildly successful. On the basis of this success and anticipated future success, the following free cash flows were projected: Source: Eugene F. Brigham; Joel F. Houston (2022). Fundamentals of Financial Management: Concise (11th Edition). Cengage Learning
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