Problem Set 3 King Waterbeds has an annual cash dividend policy that raises the

Question

Problem Set 3 King Waterbeds has an annual cash dividend policy that raises the dividend each year by 4%. Last year's dividend was $0.40 per share. What is the price of this stock if an investor wants a 5% return? 2. Staton-Smith Software is a new up-start company and will not pay dividends for the first five years of operation. It will then institute an annual cash dividend policy of $2.50 with a constant growth rate of 5% with the first dividend at the end of year six. What is the price of this stock if an investor wants a 10% Tiuon? 3.Suppose that the consensus forecast of security analysts of your favorite company is that earnings next year will be E-$5.00 per share. Suppose that the company tends to plowback 50% of its earnings and pay the rest as dividends. If the Chief Financial Officer (CFO) estimates that the company's growth rate will be 8% from now onwards, answer the following questions. 3.1 If your estimate of the company's required rate of return on its stock is 10%, what is the equilibrium price of the stock? 3.2 Suppose you observe that the stock is selling for $50.00 per share, and that this is the best estimate of its equilibrium price. What would you conclude about either (i) your estimate of the stock's required rate of return; or (ii) the CFO's estimate of the company's future growth rate? 3.3 Suppose your own 10% estimate of the stock's required rate of return is shared by the rest of the market. What does the market price of $50.00 per share imply about the market's estimate of the company's growth rate?

Explanation / Answer

1)

Stock price (P0) D1÷(r-g) Here, Expected dividend (D1) $                   0.42 0.4*(1+4%) Required return ( r) 5.00% Growth rate (g) 4.00% Stock price (P0) $                 41.60 0.42/(5%-4%)

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

---

---

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