The investment banking firm of Einstein & Co. will use a dividend valuation mode

Question

The investment banking firm of Einstein & Co. will use a dividend valuation model to appraise the shares of the Modern Physics Corporation. Dividends (D1) at the end of the current year will be $1.70. The growth rate (g) is 10 percent and the discount rate (Ke) is 13 percent.

  
a. What should be the price of the stock to the public? (Do not round intermediate calculations and round your answer to 2 decimal places.)
  

b. If there is a 3 percent total underwriting spread on the stock, how much will the issuing corporation receive? (Do not round intermediate calculations and round your answer to 2 decimal places.)
  

c. If the issuing corporation requires a net price of $55.17 (proceeds to the corporation) and there is a 3 percent underwriting spread, what should be the price of the stock to the public? (Do not round intermediate calculations and round your answer to 2 decimal places.)
  

Explanation / Answer

a.

According to dividend-discount model,

P0 = D1/(R-G)

P0 = Current stock price

D1 - Dividend at t =1

R - Required rate

G - Growth rate

P0 = 1.7/(0.13-0.1) = 56.67

Stock price = $56.67

b.

Net price = Public price*(1-Spread)

= 56.67*(1-0.03) = $54.97

c.

Public price = Net price/(1-Spread)

= 55.17/(1-0.03) = $56.88

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