513. Suppose Rick's Software Co. does not currently pay a dividend, but expects to beginpaying a $3 dividend in 12 years and that dividends will grow by 9% every yearthereafter. If your required return on Rick's Software stock is 16%, what would you bewilling to pay for the stock?Hint: Po =#3ED₁ D₂D3++(1+R)1 (1+R)² (1+R)³D14. Metallica Bearings, Incorporated, is a young start-up company. No dividends will be paidon the stock over the next nine years because the firm needs to plow back its earnings tofuel growth. The company will a dividend of $10 per share 10 years from today andwill increase the dividend by 4 percent per year thereafter. If the required return on thisstock is 12.5 percent, what is the current share price?Hint: Po =4)$4RLLD₁D2(1+R)2(1+R)1F+F4%5+T++D3(1+R)3G++15. Lohn Corporation is expected to pay the following dividends over the next four years:$15, $18, $20, and $21. Afterward, the company pledges to maintain a constant 6 percentgrowth rate in dividends forever. If the required return on the stock is 8.75 percent, what6DtPt(1+R)t (1+R)t'+F6YDt(1+R)tH+*F7Pt(1+R)t&7where PUwhere P =PrtScn FBJ=8Dex(1+g)_ Dt+1R-g R-gDtx(1+g)_ Dt+1R-g R-gHome9KEndF10OPgUp F11LPPgC

Name: 513. Suppose Rick's Software Co. does not currently pay a dividend, b
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Description: 513. Suppose Rick's Software Co. does not currently pay a dividend, but expects to beginpaying a $3 dividend in 12 years and that dividends will grow by 9% every yearthereafter. If your required return on Rick's Software stock is 16%, what would you

Value of stock can be found as the present value of dividend and present value of growth of dividend…

Business

Finance

5. Suppose Rick's Software Co. does not currently pay a dividend, but expects to begin paying a $3 dividend in 12 years and that dividends will grow by 9% every year thereafter. If your required return on Rick's Software stock is 16%, what would you be willing to pay for the stock? Hint: Po = D₂ D3 D₁ + (1+R)1 (1+R)2 (1+R)³3 + + +. Dt (1+R) + Pt (1+R) where P = Dex(1+8) Dt+1 R-g R-g

5. Suppose Rick's Software Co. does not currently pay a dividend, but expects to begin paying a $3 dividend in 12 years and that dividends will grow by 9% every year thereafter. If your required return on Rick's Software stock is 16%, what would you be willing to pay for the stock? Hint: Po = D₂ D3 D₁ + (1+R)1 (1+R)2 (1+R)³3 + + +. Dt (1+R) + Pt (1+R) where P = Dex(1+8) Dt+1 R-g R-g

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter7: Common Stock: Characteristics, Valuation, And Issuance

Section: Chapter Questions

Problem 6P

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Start with the partial model in the file Ch07 P27 Build a Model.xlsx on the textbook’s Web site. Hamilton Landscaping’s dividend growth rate is expected to be 30% in the next year, drop to 15% from Year 1 to Year 2, and drop to a constant 5% for Year 2 and all subsequent years. Hamilton has just paid a dividend of $2.50, and its stock has a required return of 11%. What is Hamilton’s estimated stock price today? If you bought the stock at Year 0, what are your expected dividend yield and capital gains for the upcoming year? What are your expected dividend yield and capital gains for the second year (from Year 1 to Year 2)? Why aren’t these the same as for the first year?
CALCULATING THE WACC Here is the condensed 2019 balance sheet for Skye Computer Company (in thousands of dollars): Skyes earnings per share last year were 3.20. The common stock sells for 55.00. last years dividend (D0) was 2.10, and a flotation cost of 10% would be required to sell new common stock. Security analysts are projecting that the common dividend will grow at an annual rate of 9%. Skyes preferred stock pays a dividend of 3.30 per share, and its preferred stock sells for 30.00 per share. The firms before-lax cost of debt is 10%, and its marginal tax rate is 25%. The firms currently outstanding 10% annual coupon rate, long-term debt sells at par value. The market risk premium is 5%, the risk-free rate is 6%, and Skyes beta is 1.516. The firms total debt, which is the sum of the companys short-term debt and long-term debt, equals 1.2 million. a. Calculate the cost of each capital component, that is, the after-tax cost of debt, the cost of preferred stock, the cost of equity from retained earnings, and the cost of newly issued common stock. Use the DCF method to find the cost of common equity. b. Now calculate the cost of common equity from retained earnings, using the CAPM method. c. What is the cost of new common stock based on the CAPM? (Hint: Find the difference between r1 and rs as determined by the DCF method, and add that differential to the CAPM value for rs.) d. If Skye continues to use the same market-value capital structure, what is the firms WACC assuming that (1) it uses only retained earnings for equity and (2) if it expands so rapidly that it must issue new common stock?
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 and 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?
Conroy Consulting Corporation (CCC) has a current dividend of D0 = $2.5. Shareholders require a 12% rate of return. Although the dividend has been growing at a rate of 30% per year in recent years, this growth rate is expected to last only for another 2 years (g0,1 = g1,2 = 30%). After Year 2, the growth rate will stabilize at gL = 7%. What is CCC’s stock worth today? What is the expected stock price at Year 1? What is the Year 1 expected (1) dividend yield, (2) capital gains yield, and (3) total return? What is its expected dividend yield for the second year? The expected capital gains yield? The expected total return?