Guff plc, an all-equity firm, has the following earnings per share and dividend history (paid annually). Year Dividend per share 8p 7.5p 7p Earnings per share 21p This year 18p last year 16p 2 years ago 6.5p 13p 3 years ago 4 years ago 14p 6p This year's dividend has just been paid and the next is due in one-year. Guff has an opportunity to invest in a new product, Stuff, during the next two years. The directors are considering cutting the dividend to 4p for each of the next two years to fund the project. However, the dividend in three years can be raised to 10p and will grow by 9% per annum thereafter due to the benefits from the investment. The company is focused on shareholder wealth maximisation and required a rate of return of 13% for its owners. Required a) If the directors chose to ignore the investment opportunity and dividends continued to grow at the historical rate what would be the value of one share using the dividend valuation model? b) If the investment is accepted, and therefore dividends are cut for the next two years, what will be the value of one share?

Guff plc, an all-equity firm, has the following earnings per share and dividend history (paid annually). Year Dividend per share 8p 7.5p 7p Earnings per share 21p This year 18p last year 16p 2 years ago 6.5p 13p 3 years ago 4 years ago 14p 6p This year's dividend has just been paid and the next is due in one-year. Guff has an opportunity to invest in a new product, Stuff, during the next two years. The directors are considering cutting the dividend to 4p for each of the next two years to fund the project. However, the dividend in three years can be raised to 10p and will grow by 9% per annum thereafter due to the benefits from the investment. The company is focused on shareholder wealth maximisation and required a rate of return of 13% for its owners. Required a) If the directors chose to ignore the investment opportunity and dividends continued to grow at the historical rate what would be the value of one share using the dividend valuation model? b) If the investment is accepted, and therefore dividends are cut for the next two years, what will be the value of one share?

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Veloo has just bought the common stock of XYZ company. The company expects to grow at the following rates for the next three years : 30%, 25%,and 15%. Last year the company paid a dividend of RM2.50. assume a required rate of return of 10%. Compute the expected dividends for the next three years and also the present value of these dividends.
CEPS Group announced today that it will begin paying annual dividends next year. The first dividend will be OMR 0.65 a share. The following dividends will be OMR 0.72, OMR 0.85, OMR 0.89, and OMR 0.95 a share annually for the following 4 years, respectively. After that, dividends are projected to increase by 4 percent per year. How much are you willing to pay to buy one share of this stock today if your desired rate of return is 11.5 percent?
You are trying to decide whether to invest in a "value" stock (Hawaii Utility Co.) or a "growth" stock (HI Tech Co.). Hawaii Utility Co. currently pays a dividend of $5 per share per year, and you expect that dividend to grow by 1% per year forever (e.g., $5.05 next year). Its price is $125. HI Tech Co. currently pays a dividend of just $1 per share per year, but you expect its dividend to grow 4%6 per year forever. The price of HI Tech Co is also $125. Given your expectations, is one company a better deal than the other? Explain why or why not? (Hint; figure out the discount rate you would need to rationalize each price using the present value rules that we went over in class).
Dalmatian Co. is currently paying a dividend of P2.20 per share. The dividends are expected to grow at 25% per year for the next four years and then grow 5% per year thereafter. Calculate the expected dividend in year 6. A. P5.37 B. P2.95 C. P5.92 D. P8.39
Beta Corporation’s current stock price is $90 and total number of shares is 1 billion. The company will generate free cash flow of $10 billion for the year ahead, all of which it will payout to its shareholders as a dividend. What would be the price at the ex dividend date? (SHOW YOUR WORK)
This year, Hope Corporation paid a dividend of $0.50 per share. The company expect dividends to increase by 4.5% each year forever. If investors require a return of 12%, what is the value of a Hope Corporation share today? a. $6.67 b. $6.97 c. $4.17 d. $7.47 e. $0.50
ABC Corporation will be investing in X Corporation shares. X provided dividends of 45 per share last year. ABC requires a return of 15% but expects X to have an equity growth rate of 9%. If ABC paid 800 for each share of X, how much did ABC over/under pay?
Pimento Inc. estimates that this year’s earnings will be $75 million. There are 12 million shares outstanding at a price of $27.50 per share. Pimento had been following a 100% dividend payout policy until now but would now like to shift to the Residual Dividend policy for this year. Dividends from this year’s earnings are paid next year. a) What is the EPS and DPS for Pimento under the 100% dividend payout policy? b) If the planned capital outlay is for $72 million and the target capital structure is 1.5:1, willPimento be able to pay dividends as per the Residual Dividend Policy? If so, what will be the dividend per share? Investors require a 22.72% rate of return. Ignore taxes. c) IfPimento shifts from a 100% payout policy to the residual dividend policy, what impact will this have on its stock price, assuming the firm earns 22.72% as its ROE? Support your argument through relevant computations. Which argument of the dividend policy decision would you have demonstrated…
Cullumber Wok Co. is expected to pay a dividend of $1.70 one year from today on its common shares. That dividend is expected to increase by 5.00 percent every year thereafter. If the price of Cullumber common stock is $17.00, what is the cost of its common equity capital? - Cost of common equity =?%
The Alfa Ltd currently pays $4.00 of dividends per share of common stock. The required rate of return on Alfa Ltd stock is 7%. a. If the expected dividend growth rate is 3% per year, forever, what is the value of a share of Alfa Ltd common stock?b. If the expected dividend growth rate is 5% per year, forever, what is the value of a share of Alfa Ltd common stock?c. If the dividend growth rate is expected to be 5% per year of the next four years and 3% thereafter, what is the value of a share of Alfa Ltd common stock?
Falon Corporation is issuing new common stock at a market price of $28. Dividends last year were $1.30 and are expected to grow at an annual rate of 7 percent forever. What is Falon's cost of common equity capital? a. 12.97% b. 11.97% c. 7.97% d. 15.79%
Red, Inc., Yellow Corp., and Blue Company each will pay a dividend of $4.15 next year. The growth rate in dividends for all three companies is 4 percent. The required return for each company’s stock is 8 percent, 11 percent, and 14 percent, respectively. What is the stock price for each company? What do you conclude about the relationship between the required return and the stock price?

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