Please show all work if possible I would really appreciate it! 1. A stock curren

Question

Please show all work if possible I would really appreciate it!

1. A stock currently has a market price per share of $25. The stock’s last cash dividend was $2 per share; the company’s earnings and dividends are expected to increase at a constant growth rate of 10% annually. Your required rate of return on this stock is 20%. From a strict valuation standpoint, is this stock fairly valued, undervalued or overvalued? Show all work.

2. ABC’s last annual cash dividend was $1.50 per share. Its current equilibrium share market price is $15.75. The company is expected to grow at an annual rate of 5%. If your required rate of return is 15%, calculate for the coming year:

a. the expected dividend yield and

b. the expected capital gains yield.

3. XYZ is in an extremely competitive market, competing with the likes of China and India. Financial analysts predict that both earnings and dividends will probably decline at a rate of 5% annually into the foreseeable future. If XYZ’s last annual dividend was $2 per share, and if investors’ required rate of return is 15%, calculate XYZ’s share price in three years’ time.

4. JNJ’s stock is currently selling at $45.83 per share. The last cash dividend paid to shareholders of record was $2.50 per share. JNJ is a constant growth firm. If investors require a return of 16% on JNJ’s stock, what do they believe JNJ’s annual growth rate to be?

5. Adelphia, Inc. has 100,000 shares of preferred stock outstanding; the stock’s par value is $50 per share. The stock pays a quarterly cash dividend of $1.25 per share. The current market price of Adelphia is $71.43. Calculate the nominal rate of return on Adelphia’s preferred stock.

Explanation / Answer

1.

Value per share=(Dividend last year*(1+growth rate))/(required rate of return-growth rate)

=(2*(1+10%))/(20%-10%)

=22

value per share=22

this is less than the current market price of 25, so it is undervalued.

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