11. Nat-T-Cat Industries just went public. As a growing firm, it is not expected

Question

11. Nat-T-Cat Industries just went public. As a growing firm, it is not expected to pay a dividend for the first five years. After that, investors expect Nat-T-Cat to pay an annual dividend $1.00 per share (i.e., D6 = 1.00), with no growth. If the required return is 10%, what is the current stock price?

17. The projected earnings per share for Risky Ventures, Inc. is $3.50. The average PE ratio for the industry composed of Risky Ventures closest competitors is 21. After careful analysis, you decide that Risky Ventures is a little more risky than average, so you decide a PE ratio of 23 better reflects the market’s perception of the firm. Estimate the current price of the firm’s stock.

Explanation / Answer

Problem 11

Expected Dividend at end of 6th Year (D6) = 1

Present value of dividend at end of 5th Year = D6/r = 1/10% = 10

Present Value today = Stock Price = 10/(1.1)^5 = 6.21

Question 17

Projected Earnings = 3.50

PE Ratio = 23

Current Price = 3.50*23 = 80.5

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