Common Stock Valuation. Blooms Textile is expected to pay annual dividend of S3.

Question

Common Stock Valuation. Blooms Textile is expected to pay annual dividend of S3.20 this year, and its predicted price is S40.00 in one year. Given your required rate of return is 13%, how much are you willing to pay for the stock? You intend to purchase Blooms Steel's common stocks at $50 per share, hold it 1 year, and sell after a dividend of $6.00 is paid. How much will the stock price have to appreciate for you to satisfy your required return of 16%? The common stock of Blooms Financials Inc. paid SI .20 dividends last year, and is expected to pay $1.29 this year. If an investor's required rate of return is 12%, what is the value of the stock? The stock sells for $30.00 in the market, what is your expected return? Would you buy the stock? Why or why not? The common stock of Blooms Computer paid SI in dividends last year. Dividends are expected to grow at an 8 percent annual rate for an indefinite number of years. If the current market price is $20, what is the stock' s expected rate of return? If your required rate of return is 12.8 percent, what is the value of the stock to you? Should you make the investment? The common stock of Blooms Technology plans to pay dividends as follows: $10 in 2015, SI 1 in 2016, $12 in 2017, S13 in 2018, but will stop in 2019 and after. If an investor's required rate of return is 15%, what is the value of the stock?

Explanation / Answer

1. let maximum price to be payable is x

Now,

Expected Return= 13%

Which means,

[($40-x)+$3.20]/x=0.13

solving for x gives us the value of x=$38.23

Therefore, Maximum price payable=$38.23

2. Let price at the enf of 1 year =x

now

[(x-50)+6]/50=0.16

which gives value of x= $52

Therefore price appreciation required to earn 16% return is ($52-$50)=$2

3. growt rate(g) =($1.29-$1.20)/$1.20=0.075

Price(P0)= D1/(Ke-g)

= $1.29/(0.12-0.075)

= $28.67

4. Ke= (D1/P0)+g

= ($1.29/30)+0.075

= 0.118 or 11.80%

5 Since invstors required rate of return (assuming 12%) exceeds actual rate of return of 11.80%, thus stock is overpriced. Therefore it is not feasible to buy the stock.

6. D1= D0(1+g)

= 1(1+.08)

= 1.08

Ke= (1.08/$20)+.08

= 13.4%

7. P0= $1.08/(0.128-0.08)

= $22.50

8. Yes, because is underpriced.

9. Assumnig thar growth rate is8% after 2018 in perpetuity

D5= D4(1+g)

= $13(1+.08)

= $14.04

Now, P4= D5/(Ke-g)

= $14.04/(0.15-0.08) = $200.57

P0= $10*0.870+$11*0.756+$12*0.658+$13*0.572+$200.57*0.572

= $147.07

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