Apocalyptica Corp. pays a constant $8.50 dividend on its stock.
Apocalyptica Corp. pays a constant $8.50 dividend on its stock. The company will maintain this dividend for the next 11 years and will then cease paying dividends forever. If the required return on this stock is 12 percent, what is the current share price? The price of any financial instrument is the PV of the future cash flows. The future dividends of this stock are an annuity for 11 years,so the price of the stock is the PVA, which will be:P0= $8.50(PVIFA12%,11) = $50.4724.
Lane, Inc., has an issue of preferred stock outstanding that pays a $4.75 dividend every year in perpetuity. If this issue currently sells for $93 per share, what is the required return?
The price a share of preferred stock is the dividend divided by the required return. This is the same equation as the constant growth model, with a dividend growth rate of zero percent.Remember, most preferred stock pays a fixed dividend, so the growth rate is zero. Using this equation, we find the price per share of the preferred stock is:R= D/P0= $4.75/$93 = .0511, or 5.11%25.
The Sleeping Flower Co. has earnings of $1.75 per share. The benchmark PE for the company is18. What stock price would you consider appropriate? What if the benchmark PE were 21?Using the equation to calculate the price of a share of stock with the PE ratio:P = Benchmark PE ratio × EPSSo, with a PE ratio of 18, we find:P = 18($1.75)P = $31.50And with a PE ratio of 21, we find:P = 21($1.75)P = $36.7526.
Maloney, Inc., has an odd dividend policy. The company has just paid a dividend of $3 per share and has announced that it will increase the dividend by $5 per share for each of the next five years, and then never pay another dividend. If you require a return of 11 percent on the company stock, how much will you pay for a share today? The price of a stock is the PV of the future dividends. This stock is paying five dividends, so the price of the stock is the PV of these dividends using the required return. The price of the stock is:P0= $8 / 1.11 + $13 / 1.112+ $18 / 1.113+ $23 / 1.114+ $28 / 1.115= $62.6927.
Frey Corp. is experiencing rapid growth. Dividends are expected to grow at 30 percent per year during the next three years, 20 percent over the following year, and then 6 percent per year indefinitely. The required return on this stock is 10 percent, and the stock currently sells for $76per share. What is the projected dividend for the coming year?
Here we need to find the dividend next year for a stock experiencing supernormal growth. We know the stock price, the dividend growth rates, and the required return, but not the dividend. First, we need to realize that the dividend in Year 3 is the current dividend times the FVIF.
The dividend in Year 3 will be:D3= D0(1.30)3And the dividend in Year 4 will be the dividend in Year 3 times one plus the growth rate, or:D4= D0(1.30)3(1.20)The stock begins constant growth in Year 4, so we can find the price of the stock in Year 4 as the dividend in Year 5, divided by the required return minus the growth rate.
The equation for the price of the stock in Year 4 is
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