14,15,16 14. Company X is expected to pay an end-of-year dividend of $5 a share.

Question

14,15,16

14. Company X is expected to pay an end-of-year dividend of $5 a share. After the dividend its stock is expected to sell at S110. If the market capitalization rate is 8%, what is the current stock price? 15. Company Z's earnings and dividends per share are expected to grow indefinitely by 5% a year. If next year's dividend is S10 and the market capitalization rate is 8%, what is the current stock price? 16. If company Z (sec Q15) wore to distribute all its eamings, it could maintain a level dividend stream of $15 a share(EPS-15). How much is the market actually paying per share for growth opportunitios?

Explanation / Answer

Ans 14

P0=(D1+P1)/(1+r)=115/1.08=106.48

Ans 15

P0=D/(K-g)=10/(0.08-0.05)=10/0.03=333.33

Ans 16

Price =EPS1/r+PVGO(present value of growth opportunities)

DIV1/(r-g)=Price1=10/0.03=333.33

15/0.08+PVGO=333.33

PVGO=145.83

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