NHL Inc.'s current return on equity (ROE) is 20%, its current book equity per share is $50, and it pays out half of its earnings as dividends. Both the ROE and payout ratio will stay constant for the next two years. After year 2, competition will force ROE down to 8%, and NHL will increase its payout ratio to 75%. The cost of capital is 10%. What is NHL's stock price today?

NHL Inc.'s current return on equity (ROE) is 20%, its current book equity per share is $50, and it pays out half of its earnings as dividends. Both the ROE and payout ratio will stay constant for the next two years. After year 2, competition will force ROE down to 8%, and NHL will increase its payout ratio to 75%. The cost of capital is 10%. What is NHL's stock price today?

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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XYZ corp expects to earn $4.1 per share next year and plow back 39.02% of its earnings (i.e., it expects to pay out a dividend of $2.5 per share, representing 60.98% of its earnings). The dividends are expected to grow at a constant sustainable growth rate and the stocks are currently priced at $30 per share. How much of the stock's $30 price is reflected in Present Value of Growth Opportunities (PVGO) if the investors' required rate of return is 20%?
Barton Industries expects next year's annual dividend, D1, to be $2.30 and it expects dividends to grow at a constant rate g = 4.9%. The firm's current common stock price, P0, is $25.00. If it needs to issue new common stock, the firm will encounter a 4.5% flotation cost, F. What is the flotation cost adjustment that must be added to its cost of retained earnings? Do not round intermediate calculations. Round your answer to two decimal places. _____% What is the cost of new common equity considering the estimate made from the three estimation methodologies? Do not round intermediate calculations. Round your answer to two decimal places. _____%
The Wei Corporation expects next year's net income to be $10 million. The firm is currently financed with 35% debt. Wei has $12 million of profitable investment opportunities, and it wishes to maintain its existing debt ratio. According to the residual distribution model (assuming all payments are in the form of dividends), how large should Wei's dividend payout ratio be next year? Round your answer to two decimal places .
CompuCon is a new firm that just paid an annual dividend of $2.25 per share. The firm plans to increase its dividend by 23 percent per year for the next four years and then decrease the growth rate to 5 percent annually. If the required rate of return is 10.25 percent, what is one share of this stock worth today?
Honda Inc. (HI) has the following capital structure, which it considers to be optimal: debt = 25%, preferred stock = 15%, and common stock = 60%. Honda Inc.’s tax rate is 40%, and investors expect earnings and dividends to grow at a constant rate of 6% in the future. Honda Inc. paid a dividend of $3.70 per share last year (D0), and its stock currently sells at a price of $60 per share. Ten-year Treasury bonds yield 6%, the market risk premium is 5%, and Honda Inc.’s beta is 1.3. The following terms would apply to new security offerings. Preferred: New preferred could be sold to the public at a price of $100 per share, with a dividend of $9. Flotation costs of $5 per share would be incurred. Debt: Debt could be sold at an interest rate of 9%. Common: New common equity will be raised only by retaining earnings a. Find the component costs of debt, preferred stock, and common stock. b. What is the WACC?
Gillette Corporation will pay an annual dividend of $0.61 one year from now. Analysts expect this dividend to grow at 11.4% per year thereafter until the 5th year. Thereafter, growth will level off at 2.2% per year. According to the dividend discount model, what is the value of a Gillette share if the firm's equity cost of capital is 8.9% ?
News Corp is expected to pay a dividend of $0.8 in one year. The dividend is expected to grow at 12% in the following 3 years and then at a constant rate of 4% per annum indefinitely. If the required rate of return is 12%, what is the price of the company's share today? Please illustrate your answer using a timeline.
The earnings of Eastern Corp. are expected to grow at an annual rate of 12% over the next 5 years and then slow to a constant rate of 8% per year. The company currently pays a dividend of $0.36 per share. What is the value of the company’s stock to an investor who requires a 14% rate of return? If the stock has a market price of $15, do you buy it ?
If the price per share of a company is $500, the current dividend (just paid) is $50 per share, that dividend is expected to grow at 5% per year and with no stock issuance cost, then the cost of financing new projects with stock issuance for that company is (A.E. annual effective):
NHL Inc.’s current return on equity (ROE) is 20%, its current book equity per share is $50, and it pays out half of its earnings as dividends. Both the ROE and payout ratio will stay constant for the next two years. After year 2, competition will force ROE down to 8%, and NHL will increase its payout ratio to 75%. The cost of capital is 10%. What is NHL’s stock price today?
NoGrowth Corporation currently pays a dividend of $1.72 per year, and it will continue to pay this dividend forever. What is the price per share if its equity cost of capital is 12% per year?
Laurel Enterprises expects earnings next year of $4.43 per share and has a 40% 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 4.4% 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.)

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