You have gathered the following information about Firm D: the current earnings per share for theyear are £0.25, and the company has just paid out 18% of the earnings as cash dividend toshareholders. The investors require a minimum equity return of 12.25%. You project that Firm D willretain 70% of its earnings for the next two years. For the subsequent two years, the firm plans onretaining 50% of its earnings. The dividend payout ratio will then increase to 60% in the followingyear. From that point forward it will retain only 10% of its earnings. The earnings growth rate is 21%until the end of year 4, and 15% for the subsequent two years. For the period thereafter theearnings and dividend growth rate will slow to a long term rate of 4.5%.Calculate the fair value of the company's shares using the dividend discount model.

AnswerThe fair value of Firm D's shares is calculated to be £3.88. Part 2: ExplanationTo calculate…

Answered: You have gathered the following…

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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Similar questions

Summit Systems will pay a dividend of $1.55 this year. If you expect Summit's dividend to grow by 5.5% per year, what is its price per share if the firm's equity cost of capital is 10.9%? The price per share is $. (Round to the nearest cent.)
Suppose that Shopify Inc. (SHOP) is selling for $36.00. Analysts believe that the growth rate for SHOP will be 30% per year for the next four years, 15% per year for the following two years, and thereafter the growth rate will be 8% indefinitely. SHOP’s most recent cash dividend per share was $3.00. The dividend will grow by the same rate as the company. Stockholders require a return of 20 percent on SHOP’s common stock. Required: Based on the above assumptions, determine the price of SHOP’s common stock. Explain whether an investor should buy the stock.
Last year Artworks, Inc. paid a dividend of $1.60. You anticipate that the company’s growth rate is 5 percent and have a required rate of return of 15 percent for this type of equity investment. What is the maximum price you would be willing to pay for the stock? Round your answer to the nearest cent.
Suppose that sales and profits of Oly Enterprises are growing at a rate of 30% per year. At the end of four years the growth rate will drop to a steady 4%. At the end of year 5, Oly will pay its first dividend in the amount of $2 per share. If the required return is 16%, what is the value of a share of stock? Assume dividends grow at the same rate as earnings after year 4.
Weasley plc has just paid a dividend of 15p per share. Next year’s dividend is expected to be 12% higher and thereafter dividends are expected to grow at a rate of 4% per annum. The cost of capital for Weasley is 8%. The management of the company is faced with an investment opportunity which will require dividends to be reduced to 4p per annum for the next five years. Dividends in six years will be 18p and they will then grow at 6% per annum. However, the market believes that the new investment increases the riskiness of Weasley plc with the result that the cost of equity capital rises to 9%. Using the dividend share valuation model, what will be the share price (to the nearest £0.01) with the investment opportunity (i) now and in (ii) four years’ time? a None of the above b (i) £4.01 and (ii) £4.12 c (i) £4.01 and (ii) £5.54 d (i) £4.06 and (ii) £4.12 e (i) £4.06 and (ii) £5.54
Consider a firm that just paid a dividend of $5.50 per share. The company expects growth in the coming 2 years to be 17%. After the second year, the firm expects dividends to grow at a constant rate of 3% per year. Assume the required rate of return is 10%
The stock of Z-Tech Plc is currently selling for £10 per share. Earnings per share in the coming year are expected to be £1.50. The company has a policy of paying out 20% of its earnings each year in dividends. The rest is retained and invested in projects that earn a 7% internal rate of return per year. This situation is expected to continue indefinitely. a. Assuming the current market price of the stock reflects its intrinsic value as computed using the constant-growth DDM, what rate of return do Z-Tech’s investors require? b. By how much does Z-Tech’s stock price change if all its earnings are paid as dividends and nothing is reinvested? c. If the company were to increase its dividend payout ratio from 20% to 60%, what would happen to its stock price?
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.)
You anticipate that Liebendauer Enterprises (ticker: LBE) will have earnings per share of $5 this year. Furthermore, you expect that they will pay out $2.50 of these earnings to shareholders in the form of a dividend at the end of this year. You estimate that LBE's return on new investments is 15% and their equity cost of capital is 13%. Your expected growth rate for LBE's dividends will be closest to: OA. 3% OB. 6.5% OC. 7.5% OD. 4.5%
Crane Corp. will pay dividends of $5.00, $6.25, $4.75, and $3.00 in the next four years. Thereafter, management expects the dividend growth rate to be constant at 6 percent. If the required rate of return is 15.50 percent, what is the current value of the stock?
ABD Ltd expects dividends per share on its ordinary shares for the next two years to be $2.3 and $3, respectively. Then the dividend will grow by 12% per annum till infinity. If investors require a rate of return of 21% p.a., what is the fair value of an ABD ordinary share today?
PIN Ltd is a firm that has been underperforming for many years and has just had a change in management. The new management team have just made an announcement that they expect to start paying an annual dividend 4 years from today, and they expect that after the initial dividend of $4 it will grow at a constant rate of 6% per annum. The required rate of return for PIN Ltd shares is 14% per annum. Which of the following is closest to the value of PIN Ltd shares? Group of answer choices $18.41 $33.75 $29.60 $21.36

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