1) Suppose the dividends for the Seger Corporation over the past six years were

Question

1) Suppose the dividends for the Seger Corporation over the past six years were $1.17, $1.25, $1.34, $1.42, $1.52, and $1.57, respectively. Compute the share price using the perpetual growth method. Assume the market risk premium is 9.6 percent, Treasury bills yield 3.8 percent, and the projected beta of the firm is 0.8. (Round your answer to 2 decimal places. Omit the "$" sign in your response.)

2)

Could I Industries just paid a dividend of $1.4 per share. The dividends are expected to grow at a 23 percent rate for the next 5 years and then level off to a 4 percent growth rate indefinitely. If the required return is 14 percent, what is the value of the stock today? (Round your answer to 2 decimal places. Omit the "$" sign in your response.)

3)When a stock is going through a period of nonconstant growth for T periods, followed by constant growth forever, the residual income model can be modified as follows:          

Al’s Infrared Sandwich Company had a book value of $17.00 at the beginning of the year, and the earnings per share for the past year were $7.50. Molly Miller, a research analyst at Miller, Moore & Associates, estimates that the book value and earnings per share will grow at 20.50 and 19.00 percent per year for the next four years, respectively. After four years, the growth rate is expected to be 6 percent. Molly believes the required return for the company is 11.40 percent. What is the value per share for Al’s Infrared Sandwich Company? (Round your answer to 2 decimal places. Omit the "$" sign in your response.)

Explanation / Answer

(1)

Perpetual growth here signifies that dividends will grow at the same rate as in last year, in perpetuity.

Last year dividend growth rate, g = (1.57 - 1.52) / 1.52 x 100 = 3.29%

Required return = risk-free rate + Beta x (Market risk premium)

= 3.8% + 0.8 x 9.6% = 11.48%

So, stock price = D0 x (1 + g) / (r - g)

= $1.57 x 1.0329 / (0.1148 - 0.0329) = $19.8

[Note: D0 = $1.57]

(2)

Growth factor during first 5 years, k = (1 + dividend growth rate) / (1 + required return)

= 1.23 / 1.14 = 1.08

So, PV of dividends from first 5 years = D0 x [k + k2 + k3 + k4 + k5 ]

Where D0 = 1.4 and k = 1.08

Substituting the values, we get

PV of dividends from first 5 years = $1.4 x 6.3359 = $8.87

PV of perpetual dividend starting year 6, discounted to current period = [$1.4 x (1.23)5 x (1.04) / (0.14 - 0.04)] / (1.14)5

= $21.29

Total present value of all dividends = current stock price = $8.87 + $21.29 = $30.16

Note: Out of 3 questions, the first 2 are answered.

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