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 5.4 percent rate indefinitely. If the firm just paid a dividend of $1.09 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 $4.9 per share. The appropriate discount rate for Bill's Bakery is 12.6 percent. Calculate the share price for Bill's Bakery if earnings grow at 4 percent forever.

Explanation / Answer

QUESTION 5

The dividend for Weaver, Inc., is expected to grow at 15 percent for the next 4 years before leveling off at a 5.4 percent rate indefinitely. If the firm just paid a dividend of $1.09 and you require a return of 11 percent on the stock, what is the most you should pay per share?

Dividend Growth for the next 4 years before levelling at 5.4 per cent

Dividend paid just now = $ 1.09

Year 2 Dividend = 1.09 X 115% = $ 1.25

Year 3 Dividend = 1.25 X 115% = $ 1.44

Year 4 Dividend = 1.44 X 115% = $ 1.66

Year 5 Dividend = 1.66 X 105.4% = $ 1.75

Return on stock expected = 11%

Assuming a stock price of $100 per share, the amount to be paid maximum per share = 1.75 / 11% X 100 =
$ 1,588.43

QUESTION 6

Bill’s Bakery expects earnings per share of 5 = $5 next year. Current book value is $4.9 per share. The appropriate discount rate for Bill's Bakery is 12.6 percent. Calculate the share price for Bill's Bakery if earnings grow at 4 percent forever.

Cannot be answered, since details regarding the investment made by Bill is not available.

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