Robert and Bob are also looking at issuing preferred and common stock to further

Question

Robert and Bob 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 Robert and Bob 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?

Explanation / Answer

Answer:a) Current value= D1/(Ke-g)

=0.80(1+0.06)/(0.14-0.06)

=0.848/(0.08)

=$10.6

Answer:b) Expected dividend yield:

Dividend Yield = Annual Dividend / Current Stock Price

=$0.848/$10.6

=8%

Answer:c) Value=0.80(1+0.08)/(0.14-0.08)

=$14.4

Answer:d) Value=0.80(1+0.06)/(0.16-0.06)

=$8.48

Answer:e) If growth rate increases ,Price also increase and if growth rate decrease than price also decreases and if required return increase ,Price decreases.

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