1. Company Zís earnings and dividends per share are expected to grow indeÖnitely by 5% a year. If next yearís dividend is $10 and the market capitalization rate is 8%, what is the current stock price? 2. Company Z-prime is like Z in Q1 above in all respects save one: Its growth will stop after year 4. In year 5 and afterward, it will pay out all earnings as dividends. What is Z-primeís stock price? Assume next yearís EPS is $15. 3. If company Z in Q1 above were to distribute all its earnings, it could maintain a level dividend stream of $15 a share. How much is the market actually paying per share for growth opportunities? 4. Under what conditions does r, a stockís market capitalization rate, equal its earningsñprice ratio EP S1=P0? 5. Mexican Motorsí market cap is 200 billion pesos. Next yearís free cash áow is 8.5 billion pesos. Security analysts are forecasting that free cash áow will grow by 7.5% per year for the next Öve years. Assume that the 7.5% growth rate is expected to continue forever. What rate of return are investors expecting? Mexican Motors has generally earned about 12% on book equity (ROE = 12%) and reinvested 50% of earnings. The remaining 50% of earnings has gone to free cash áow. Suppose the company maintains the same ROE and investment rate for the long run. What is the implication for the growth rate of earnings and free cash áow? For the cost of equity? Should you revise your answer to part (a) of this question?
1. Company Zís earnings and dividends per share are expected to grow indeÖnitely by 5% a year. If
next yearís dividend is $10 and the market capitalization rate is 8%, what is the current stock price?
2. Company Z-prime is like Z in Q1 above in all respects save one: Its growth will stop after year 4.
In year 5 and afterward, it will pay out all earnings as dividends. What is Z-primeís stock price?
Assume next yearís EPS is $15.
3. If company Z in Q1 above were to distribute all its earnings, it could maintain a level dividend
stream of $15 a share. How much is the market actually paying per share for growth opportunities?
4. Under what conditions does r, a stockís market capitalization rate, equal its earningsñprice ratio
EP S1=P0?
5. Mexican Motorsí market cap is 200 billion pesos. Next yearís free cash áow is 8.5 billion pesos.
Security analysts are forecasting that free cash áow will grow by 7.5% per year for the next Öve
years.
Assume that the 7.5% growth rate is expected to continue forever. What rate of return are
investors expecting?
Mexican Motors has generally earned about 12% on book equity (ROE = 12%) and reinvested
50% of earnings. The remaining 50% of earnings has gone to free cash áow. Suppose the company maintains the same ROE and investment rate for the long run. What is the implication
for the growth rate of earnings and free cash áow? For the cost of equity? Should you revise
your answer to part (a) of this question?
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