Managerial Finance

21. Universal Forests current stock price is $154.00 and it is likely to pay a $5.23 dividend next year. Since analysts estimate Universal Forest will have a 13.0% growth rate what is the required return?

A firm has an expected dividend next year of $1.20 per share, a zero growth rate

Suppose Ace, over the last few years, has had an 18 percent average return on equity (ROE) and has paid out 20 percent of its net income as dividends. Under what conditions could this information be used to help estimate the firm’s expected future growth rate, g? Estimate ks using this procedure for determining g.

11. Managers of POM Corp. wish to maximize the long term share price of the firm. Investors are aware of this. In this situation, if the managers of POM announce an equity issue, investors will conclude that the share price is __A1__. Therefore they will __A2__ the shares at the offered price. Anticipating this condition, the managers would __A3__.

b. What would Mrs. Beach have to deposit if she were to use common stock and earned an average rate of return of 11%.

-Martin Industries just paid an annual dividend of $1.30 a share. The market price of the stock is $36.80 and the growth rate is 6.0 percent. What is the firm's cost of equity?

Dividends were assumed to grow at the geometric average of the last 6 years, 20.28%. P0 = D2 Dn Pn D1 + + ··· + + 1 2 n (1 + Ke ) (1 + Ke ) (1 + Ke ) (1 + Ke )n $1.58 $2.28 $87.31 $1.31 + + ··· + + = 1 2 4 (1 + 7.0%) (1 + 7.0%) (1 + 7.0%) (1 + 7.0%)4 = $72.53

23) Danroy Inc has announced a $5 dividend. If Danroy's last price while trading cum-dividend is $65, what should its first ex-dividend price be (assuming perfect capital markets)?

• Pe = D1/(re – g) = 700 / (0.11 – 0.05) = $11,667 • price per share = $11,667 / 1,000 = $11.67 3. Same facts as (2) above, except the 5% income growth rate (and beginning of year common equity to support it) are only expected for years 2 and 3. Then growth is expected to be zero and all income is expected to be distributed to shareholders for all future years. a. Compute D1, D2, D3, and Dt for all future years. • Keeping in mind that income is $1,100 in year 1, increases by 5% in years 2 and 3, and then remains constant for all future years; and keeping in mind that beginning of year 1 common equity is $8,000, increases by 5% at the beginning of year 2 and at the beginning of year 3, but does not increase at the beginning of year 4 and remains constant from that point forward, you should be able to compute: D1 = $700, D2 = $735, and Dt = 1,212.75 for D3 and all future years. b. Use the dividend discount (i.e., free cash flow to equity investors) valuation model to estimate the company’s current stock price. Pe = 700/(1+ 0.11) + 735/(1+ 0.11)2 + [1,212.75/0.11]/(1+ 0.11)2 = $10,175.31 and the price per share of common stock = $10,175.31 / 1,000 = $10.18. 4. Same facts as (3) above, except the growth rates are 5% for years 2 and 3 and then 3% perpetually for all future years. a. Compute D1, D2, D3 and the growth in D for all future years. • Keeping in mind that income is $1,100 in year 1, increases by 5% in years 2

Part a. Period 1 2 3 4 5 dividend 1.1 1.15 1.25 1.37 1.5 Average growth (Arithmetic) growth 0.045 0.087 0.096 0.095 Growth = (P2 - P1)/P1

4) Company Q’s current rate of return (ROE) is 14%. It pays out (payout ratio) half of its earnings as dividends. Current book value is $50 per share. Book value per share will grow as Q reinvests earnings.

A sinking fund reduces coupon rate because it provides a kind of future guarantee to bondholders. The company must make payments into the sinking fund or default so it must

The standard method of calculating a stock price using the perpetual dividend growth model is done by assessing a company’s dividend one year into the future adding the future expected growth rate. The formula is written as: P0 = D1/(Ke − g), where Ke is the investor required return, D1 is next year’s dividend and g is the

Storico Co. just paid a dividend of aud 3.5 per share. The company will increase its dividend by 20% next year, and will then reduce its dividend growth rate by 5% per year, until it reaches the industry average of 5% industry average growth, after which the company will keep a constant growth rate forever. If the required return on Storico stock is 13%, what will a share of stock sell for today?

A call provision in a bond issue, the issuer of the bond principal plus any call premium costs and allows for early repayment. Interest rates have declined greatly in the economy, most of the time because it is a bond issuer, it is. The issuer issues new securities to current securities and lower interest calls. For this you have to pay each year for the issuer to reduce interest payments