Houston Technology's beta is estimated to be 1.4. The firm's stock is expected to pay adividend of $5 at the end of this year and is currently selling for $65. The S&P 500 iscurrently returning 14%. If the firm expects constant growth in the future of 8%, what is thefirm's after-tax cost of equity? Assume a tax rate of 40%. (6)

1. Capital Asset Pricing Model (CAPM)First, calculate the required return using CAPM:Required…

Answered: Houston Technology's beta is estimated…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Tanrun Inc. is expected to pay an annual dividend of $0.45 per share in one year. Analysts expect the firm's dividends to grow by 4% forever. Its stock price is $35.1 and its beta is 1.5. The risk-free rate is 2% and the market risk premium is 4.5%. A. What is the best guess for the cost of equity? Recall that both Dividend Growth Model and CAPM can be used to find cost of equity. Here assume the best guess is the simple average of the two.
Laurel Enterprises expects earnings next year of $4.00 per share and has a 40% retention rate, which it plans to keep constant. Its equity cost of capital is 10%, which is also its expected return on new investment. Its earnings are expected to grow forever at a rate of 4.0% per year. If its next dividend is due in one year, what do you estimate the firm's current stock price to be? The current stock price will be $________ (Round to the nearest cent.)
If you were analyzing the consumer goods industry, for which kind of company in the industry would the constant growth model work best? Walter Utilities is a dividend-paying company and is expected to pay an annual dividend of $1.45 at the end of the year. Its dividend is expected to grow at a constant rate of 7.00% per year. If Walter’s stock currently trades for $29.00 per share, then the expected rate of return on the stock is Which of the following conditions must hold true for the constant growth valuation formula to be useful and give meaningful results?
The firm just paid an annual dividend of $0.8 per share and plans to increase that amount by 25% next year. After that, the firm expects the dividend will grow by 3% annually. What is the expected value of this stock if the required return is 13 percent? 9.9 10 10.3
Laurel Enterprises pays annual dividends, and the next dividend is expected to be in one year. Laurel expects earnings next year of $3.58 per share and has a 50% retention rate, which it plans to keep constant. Its equity cost of capital is 11%, which is also its expected return on new investment; this is expected to continue forever. What do you estimate the firm's current stock price to be? (Hint: its next dividend is due in one year.) C The current stock price will be $ (Round to the nearest cent.)
Bugatti, Inc is expected to pay a dividend of $3.55 next year (i. e., D1 = 3.55) and its current stock price is $48. The discount rate for the company is 13%. If the market expects Bugatti's dividends to grow at a constant rate forever, then the growth rate must be %
Analysts project that dividends for Industrial Amalgamated will be $2.00 per share next year and are expected to grow at 2.1% per year indefinately. If investor's have a required return of 8.5%, how much should the stock sell for?
Analysts forecast that Dixie Chicks, Inc. (DCI) will pay a dividend of $3.00 a share now, continuing a long-term growth trend of 8% per year. If this trend is expected to continue indefinitely, and investors' required rate of return for DCI is 14%: a) What is the market value per share of DCI's common stock? b) What is the market value per share of DCI's common stock if required rate of return is 11%? c) If there is expected to be non-constant growth of 30% for the first year, then 24% for the next year, then 14% for next year, finally stabilizing to a constant growth of 9% per year in the 4th year what is the market value per share with the original required rate of return?
Banco Tech is an early stage financial technology firm. Earnings this year where $20 per share and are expected to grow at 20% per year for the next three years. Banco does not plan to pay a dividend until three years time, when the payout ratio will be 43%. Dividends are expected to grow at 6% thereafter. The required rate of return is 9%. Calculated intrinsic value.
Laurel Enterprises expects earnings next year of $4.29 per share and has a 50% retention rate, which it plans to keep constant. Its equity cost of capital is 11%, which is also its expected return on new investment. Its earnings are expected to grow forever at a rate of 5.5% per year. If its next dividend is due in one year, what do you estimate the firm's current stock price to be? The current stock price will be $ (Round to the nearest cent.)
Assume IBM is expected to pay a total cash dividend of $3.90 next year and dividends are expected to grow indefinitely by 3.0 percent a year. Assume the required rate of return (i.e. equity holder's opportunity cost of capital) is 9.3 percent. Assuming this is the best information available regarding the future of this firm, what would be the most economically rational value of the stock today (i.e. today's "price")? Answer to 2 decimal places.
Laurel Enterprises expects earnings next year of $3.99 per share and has a 50% retention rate, which it plans to keep constant. Its equity cost of capital is 11%, which is also its expected return on new investment. Its earnings are expected to grow forever at a rate of 5.5% per year. If its next dividend is due in one year, what do you estimate the firm's current stock price to be?

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