Stephen and Chris are also looking at issuing preferred and common stock to furt

Question

Stephen and Chris are also looking at issuing preferred and common stock to further expand TechU's businesses.   They also want to examine their existing stock value to get a picture of how much they can sell additional stock for. Help Stephen and Chris by answering the following questions.

1.)The last dividend TechU paid was $0.80. The historical growth rate in dividends has been 6%, and analysts expect it to remain constant for the foreseeable future. Investors require a 14 percent rate of return.

a) What is the current value or price of TechU's stock?

b) What is the expected dividend yield?

c) If the growth rate was 8 instead of 6 percent, what would be the value of TechU's stock?

d) If the growth rate was as originally stated (6 percent) but the required rate of return increased from 14 to 16 percent, what would be the value of TechU's stock?

e) Based on the answers for c. and d., what is the relationship between growth rates and stock price and required return and stock price?

2.) Instead of the information in question 1, what if analysts expect TechU's dividend to grow by 25 percent for the next 3 years, but increased competition is expected to force their growth rate to a constant 6 percent thereafter. TechU just paid a dividend of $0.80, and investors’ rate of return is 14%. What is the value of TechU's stock today?

3.) TeleU, the company TechU is looking at purchasing, expected their dividend to grow at a rate of 35 percent for the next four years, then to drop to a growth rate of 15 percent for 2 more years, and then settle down to a 10 percent growth rate thereafter. TeleU just paid a dividend of $2.50. Investors’ required rate of return is 12 percent. What would TechU be willing to pay for TeleU's stock?

4.)Instead of common stock, TechU is also looking at issuing preferred stock so Stephen Jobs can retain close ownership in the company. The preferred stock has a par value of $50 and will pay a 5% dividend per year. If the required return for investors is 8%, what is the value of the preferred stock?

Explanation / Answer

1a)

P0= D1/(R -g) = D0 (1 -g)/(R - g)

p0=0.80(1.06)/(0.14-0.06)

p0=$10.6 or $11

1b) if we take number of periods as 5 years then the devidend yeild is

D5 = D0 * (1 +g)5

=0.80(1+0.06)5=$1.0706

1c) if the growth rate is increased 8%

then p0=0.80(1.08)/(0.14-0.08)=$14.4

1d) if reqired rate of return is changed

then p0=0.80(1.06)/(0.16-0.06)=$8.48

1e) baced on the c and d we find that growth rate increases price of the bond increses, reqired return increases price decreases

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