QUESTION 5 The dividend for Weaver, Inc., is expected to grow at 22 percent for

Question

QUESTION 5

The dividend for Weaver, Inc., is expected to grow at 22 percent for the next 4 years before leveling off at a 5.1 percent rate indefinitely. If the firm just paid a dividend of $1.3 and you require a return of 14 percent on the stock, what is the most you should pay per share?

QUESTION 6

Bill’s Bakery expects earnings per share of 5 = $5 next year. Current book value is $4.5 per share. The appropriate discount rate for Bill's Bakery is 12.5 percent. Calculate the share price for Bill's Bakery if earnings grow at 4.9 percent forever.

Explanation / Answer

Q5 Statement showing calculation of Price of Stock Particulars Time PVF@14% Amount PV(Amount *PVF) Cash inflows Dividend (1.3*1.22)                   1.000                              0.8772                                  1.59                                  1.39 Cash inflows Dividend (1.3*1.22)                   2.000                              0.7695                                  1.93                                  1.49 Cash inflows Dividend (1.3*1.22)                   3.000                              0.6750                                  2.36                                  1.59 Cash inflows Dividend (1.3*1.22)                   4.000                              0.5921                                  2.88                                  1.71 Cash inflows Price = 2.88*1.051/(14%-5.1%)                   4.000                              0.5921                                34.01                                20.14 PV of Stock Price                                26.32 Q6 EPS at end of year                     5.00 Assuming all earnings are paid out therefore D1 = 5 ke 12.50% g 4.90% P = D1/(ke-g) P = 5/(12.50%-4.90%) P = 65.79

Related Questions

Navigate

• Browse (All)
• Browse Q
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.