Case 78 Questions McDaniel Nienberg Palmer Pastor
Questions 1. According to ValueLine estimates in Figure 1, James River’s expected annual dividend growth rate from the 91–93 to 97–99 period is 5.50%, and the next dividend (1995) is expected to be $0.60. Assume that the required return for James River was 8.36% on January 1 1995 and that the 5.50% growth rate was expected to continue indefinitely. a. Based on the Constant Growth Rate or Gordon Model, what was James River’s price at the beginning of 1995? b. What conditions must hold to use the constant growth model?
c. Do many “real world” stocks satisfy the constant growth assumptions? 2. The Wall Street Journal (WSJ) lists the current price of James River common stock at $27.00. a. Based on this information, the ValueLine 1995 expected dividend, and the annual rate of dividend change for the growth estimate, what is the company’s return on common stock using the constant growth model? What is the expected dividend yield and expected capital gains yield?
Explain the difference in the required return estimates from the ValueLine (see question 1a) to the WSJ price data. b. What is the relationship between dividend yield and capital gains yield over time under constant growth assumptions? 3. A successful joint venture is expected to result in the 4.0% growth rate until 2000 but would increase the company’s normal growth rate to a constant 8.00% after that time. The joint venture also is expected to increase investors’ required return to 9.50%. a. Based on this information, what is the value of the company’s stock?
b. What is the value of the stock at the end of the first year assuming that the stock is in equilibrium?
c. What is the dividend yield, capital gains yield, and total yield of the stock for the year? If you are using the spreadsheet model for this case, discuss the changes in dividend yields and capital gains yields over time. 4. One method of determining the company’s growth rate is from the fundamentals of the
c. Do many “real world” stocks satisfy the constant growth assumptions? 2. The Wall Street Journal (WSJ) lists the current price of James River common stock at $27.00. a. Based on this information, the ValueLine 1995 expected dividend, and the annual rate of dividend change for the growth estimate, what is the company’s return on common stock using the constant growth model? What is the expected dividend yield and expected capital gains yield?
Explain the difference in the required return estimates from the ValueLine (see question 1a) to the WSJ price data. b. What is the relationship between dividend yield and capital gains yield over time under constant growth assumptions? 3. A successful joint venture is expected to result in the 4.0% growth rate until 2000 but would increase the company’s normal growth rate to a constant 8.00% after that time. The joint venture also is expected to increase investors’ required return to 9.50%. a. Based on this information, what is the value of the company’s stock?
b. What is the value of the stock at the end of the first year assuming that the stock is in equilibrium?
c. What is the dividend yield, capital gains yield, and total yield of the stock for the year? If you are using the spreadsheet model for this case, discuss the changes in dividend yields and capital gains yields over time. 4. One method of determining the company’s growth rate is from the fundamentals of the