. (Common stock valuation) The common stock of NCP paid $1.27 in dividends last year. Dividends are expected to grow at an annual rate of 8.90
3. (Common stock valuation)
The common stock of NCP paid
$1.27 in dividends last year. Dividends are expected to grow at an annual rate of
8.90percent for an indefinite number of years.
a. If your required rate of return is 11.40percent,what is the value of the stock for you?
b.Should you make the investment?
4. (Common stock valuation)
Wayne, Inc.’s outstanding common stock is currently selling in the market for $21. Dividends of $3.33per share were paid last year, return on equity is 15 percent, and its retention rate is 23 percent.
a.What is the value of the stock to you, given a required rate of return of
19percent?
b. Should you purchase this stock?
5.(Measuring growth)
Thomas, Inc.’s return on equity is 15 percent and management has plans to retain
22percent of earnings for investment in the company.
a. What will be the company’s growth rate?
b.How would the growth rate change if management (i) increased retained earnings to
33 percent or (ii) decreased retention to 11
percent?
6. (Measuring growth)
Green Gadgets Inc. is trying to decide whether to cut its expected dividend for next year from $9per share to $6 per share in order to have more money to invest in new projects. If it does not cut thedividend, Green Gadgets’ expected rate of growth in dividends is 5 percent per year and the price of their common stock will be $105.per share. However, if it cuts its dividend, the dividend growth rate is expected to rise to 8percent in the future. Assuming that the investor’s required rate of return for Green Gadgets’ stock does not change, what would you expect to happen to the price of its common stock if it cuts the dividend to $6?
Should Green Gadgets cut its dividend? Support your answer as best you can.
7. (Common stock valuation)
Dubai Metro’s stock price was at $100per share when it announced that it will cut its dividend for next year from $8 per share to $4per share, with additional funds used for expansion. Prior to the dividend cut, Dubai Metro expected its dividends to grow at a 4percent rate, but with the expansion, dividends are now expected to grow at 7percent. How do you think the announcement will affect Dubai Metro’s stock price?
8, Relative valuation of common stock)
Using the P/E ratio approach to valuation, calculate the value of a share of stock under the followingconditions:
•the investor’s required rate of return is 16percent,
•the expected level of earnings at the end of this year (Upper E 1E1) is $5,
•the firm follows a policy of retaining 40 percent of its earnings
• the return on equity (ROE) is 14 percent, and
• similar shares of stock sell at multiples of 5.770 times earnings per share.
Now show that you get the same answer using the discounted dividend model.
a. The stock price using the P/E ratio valuation method is
$______ (Round to the nearest cent.)
9. (Preferred stock valuation)
You own100 shares of Somner Resources’ preferred stock, which currently sells for $22 per share and pays annual dividends of $3.50 per share. If the market’s required yield on similar shares is 14 percent, should you sell your shares or buy more?
a. The value of the stock to you is
$per share. (Round to the nearest cent.)
b. Should you sell your shares or buy more?
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