QUESTION 5 The dividend for Weaver, Inc., is expected to grow at 15 percent for

Question

QUESTION 5

The dividend for Weaver, Inc., is expected to grow at 15 percent for the next 4 years before leveling off at a 5.2 percent rate indefinitely. If the firm just paid a dividend of $1.05 and you require a return of 11 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 $4.3 per share. The appropriate discount rate for Bill's Bakery is 12.2 percent. Calculate the share price for Bill's Bakery if earnings grow at 4.3 percent forever.

Explanation / Answer

1)

terminal value = 1.8365(1+.052) /(.11- .052)

                    = 1.8365 (1.052) / .058

                   = 1.932 /.058

                  = 33.31

6) share price = EPS / (cost of equity -growth)

                     = 5 / (.122 - .043)

                     = 5 / .079

                    = $ 63.29 per share

year Dividend present value @11% present value of dividend 1 1.2075     [1.05(1+.15)] .90090 1.0878 2 1.3886      [1.2075(1+.15)] .81162 1.1270 3 1.5969      [1.3886(1+.15)] .73119 1.1676 4 1.8365     [1.5969(1+.15)] .65873 1.2098 4Terminal value 33.31 .65873 21.942 Price to be paid for share $ 26.53 per share

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