Fin 515 Week 4 Homework Assignment

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Constant Growth Valuation
Boehm Incorporated is expected to pay a $1.50 per share dividend at the end of this year (i.e., D1 = $1.50). The dividend is expected to grow at a constant rate of 7% a year. The required rate of return on the stock, rs, is 15%. What is the value per share of Boehm’s stock?

For this problem we can use the formula from the book P=d1(R-G) to find the price. We just need to plug in the values... so, 1.5/(8% [15-7]). The value is 18.75.

Preferred Stock Valuation
Nick’s Enchiladas Incorporated has preferred stock outstanding that pays a dividend of $5 at the end of each year. The preferred sells for $50 a share. What is the stock’s required rate of return?

From the book we discover that we simply need to plug into the formula, r=5/50. The required rate of return should be 10 percent.

Nonconstant Growth Valuation
A company currently pays a dividend of $2 per share (D0 = $2). It is estimated that the company’s dividend will grow at a rate of 20% per year for the next 2 years, then at a constant rate of 7% thereafter. The company’s stock has a beta of 1.2, the risk-free rate is 7.5%, and the market risk premium is 4%. What is your estimate of the stock’s current price?

I used the financial calculator online for this problem, but we can find it manually...

To solve this problem we need to first calculate the required rate of return, which is Rs=Rf+B(Rrm-Rrf), so 7.5+(11.5-7.5)*1.2=12.3... So, D0 would be 2, D1 would be 2.4, D2 would be 2.88, and D3 would be 3.08. We then have to calculate the PV for the dividends, which is 4.42. We have to calculate P2, which came out to 46.10. After adding up the PV values we get the stock’s price which is 50.50, or at least that’s what I got...

After-Tax Cost of Debt
Calculate the after-tax cost of debt under each of the following conditions: •a. Interest rate of 13%, tax rate of 0%
To calculate, take...
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