Fin515 Homework 4

FIN515 Homework 4

Chiquita King

Keller University

FIN/515: Managerial Finance

Stephen Ewing August 5, 2012

August 5, 2012 Stephen Ewing

-3%

|There are 9 answers in the Week 4 homework, plus the title page. |

|Each answer is worth 10% of the homework grade and the title page is worth 10%. |

| |

|Homework grade = 97% |

|97% x 30 points = 29 points |

(7-2) 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?

D1= $1.50 per share

g = 7%

rs= 15%

P0 = D1 /(rs – g)

P0 = 1.50/(0.15-0.07)

P0 = $18.75

(7-4) 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?

Dividend = $5

Preferred = $50

P0 = D/rs

rs = D/P0

rs = 5/50

rs = 10%

(7-5) 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...