UNIT3 4. Following are projections for required rates of return: SECURITY Consta
ID: 2825980 • Letter: U
Question
UNIT3 4. Following are projections for required rates of return: SECURITY Constant-Growth Stock Low-growth Common Stock High-growth Common Stock 10% 12% 1796 For the common stock Constant-growth-growth rate of 5% Do-$2.00 Low-growth-D $4.00, growth at 6% per year for 3 years, followed by a rate of 4% forever High-growth-Do-$1.00, growth at 30% for next 4 years, followed by a rate of 7% forever a. What will be the value per share for the constant growth stock? b. What will be the value per share for the low-growth stock? c. What will be the value per share for the high-growth stock? 5. Scott Manufacturing is a firm in the machine-tool-component industry. The firm's most recent common-stock dividend was $2.10 per share. Due to its stable sales and earnings, the firms management feels that the dividends will remain at the current level for the foreseeable futureExplanation / Answer
a)
Value per share for constant growth stock = D1/ required rate of return - growth rate
Value per share for constant growth stock = [ 2 ( 1 + 0.05) / 0.1 - 0.05]
Value per share for constant growth stock = [ 2.1 / 0.05 ]
Value per share for constant growth stock = $42
b)
Year 1 dividend = 4 * 1.06 = 4.24
Yaer 2 dividend = 4.24 * 1.06 = 4.4944
year 3 dividend = 4.4944 * 1.06 = 4.764064
year 4 dividend = 4.764064 * 1.04 = 4.954627
Present value at year 3 = D1 / required rate - growth rate
Present value at year 3 = 4.954627 / 0.12 - 0.04
Present value at year 3 = 61.932832
Present value of 61.932832 = 61.932832 / ( 1 + 0.12)3
Present value = 44.082567
Present value of year 3 dividend = 4.764064 / ( 1 + 0.12)3 = 3.390967
Present value of year 2 dividend = 4.4944/ ( 1 + 0.12)2 = 3.582908
Present value of year 1 dividend = 4.24 / ( 1 + 0.12) = 3.785714
Value per share for low growth stock = 3.785714 + 3.582908 + 3.390967 + 44.082567
Value per share for low growth stock = $54.842
c)
Year 1 dividend = 1 * 1.3 = 1.3
Yaer 2 dividend = 1.3 * 1.3 = 1.69
year 3 dividend = 1.69 * 1.3 = 2.197
year 4 dividend = 2.197 * 1.3 = 2.8561
Year 5 dividend = 2.8561 * 1.07 = 3.056027
Present value at year 4 = D1 / required rate - growth rate
Present value at year 4 = 3.056027 / 0.17 - 0.07
Present value at year 4 = 30.56027
Present value of 30.56027 = 30.56027 / ( 1 + 0.17)4
Present value = 16.30849
Present value of year 4 dividend = 2.8561 / ( 1 + 0.17)4 = 1.524158
Present value of year 3 dividend = 2.197 / ( 1 + 0.17)3 = 1.371742
Present value of year 2 dividend = 1.69 / ( 1 + 0.17)2 = 1.234568
Present value of year 1 dividend = 1.3 / ( 1 + 0.17) = 1.1111
Value per share for low growth stock = 1.1111 + 1.234568 + 1.371742 + 1.524158 + 16.30849
Value per share for high growth stock = $21.55
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.