Fundamentals of Corporate Finance (Special Edition for Rutgers Business School)
11th Edition
ISBN: 9781308509853
Author: Ross, Westerfield, Jordan
Publisher: McGraw Hill
expand_more
expand_more
format_list_bulleted
Textbook Question
Chapter 8, Problem 26QP
Stock Valuation and PE [LO2] Summers Corp. currently has an EPS of $4.04, and the benchmark PE for the company is 21. Earnings are expected to grow at 5.5 percent per year.
a. What is your estimate of the current stock price?
b. What is the target stock price in one year?
c. Assuming the company pays no dividends, what is the implied return on the company’s stock over the next year? What does this tell you about the implicit stock return using PE valuation?
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solutionStudents have asked these similar questions
Q14: Suppose a company is expected to pay a dividend of $2.30 per share next year. Assuming the dividend growth rate is 5% a year and the market requires a return of 12%, how much should the stock be selling for?
H5.
In practice, a common way to value a share of stock when a company pays dividends is to value the dividends over the next five years or so, then find the “terminal” stock price using a benchmark PE ratio. Suppose a company just paid a dividend of $1.41. The dividends are expected to grow at 13 percent over the next five years. In five years, the estimated payout ratio will be 30 percent and a benchmark PE will be 19. The required return is 11 percent.
a) What is the target stock price in five years?
b) What is the stock price today?
Question 4
Suppose that the consensus forecast of security analysts of your favorite company is that earnings next year will be E1 = $5.00 per share. Suppose that the company tends to plow back 50% of its earnings and pay the rest as dividends. If the Chief Financial Officer (CFO) estimates that the company’s growth rate will be 8% from now onwards, answer the following questions.
a) If your estimate of the company’s required rate of return on its stock is 10%, what is the equilibrium price of the stock?
b) Suppose you observe that the stock is selling for $50.00 per share, and that this is the best estimate of its equilibrium price. What would you conclude about either (i) your estimate of the stock’s required rate of return; or (ii) the CFO’s estimate of the company’s future growth rate?
c) Suppose your own 10% estimate of the stock’s required rate of return is shared by the rest of the market. What does the market price of $50.00 per share imply about the market’s estimate of…
Chapter 8 Solutions
Fundamentals of Corporate Finance (Special Edition for Rutgers Business School)
Ch. 8.1 - Prob. 8.1ACQCh. 8.1 - Does the value of a share of stock depend on how...Ch. 8.1 - What is the value of a share of stock when the...Ch. 8.2 - Prob. 8.2ACQCh. 8.2 - Prob. 8.2BCQCh. 8.2 - Why is preferred stock called preferred?Ch. 8.3 - Prob. 8.3ACQCh. 8.3 - Prob. 8.3BCQCh. 8.3 - How does NASDAQ differ from the NYSE?Ch. 8 - A stock is selling for 11.90 a share given a...
Ch. 8 - An 8 percent preferred stock sells for 54 a share....Ch. 8 - Prob. 8.3CTFCh. 8 - Stock Valuation [LO1] Why does the value of a...Ch. 8 - Stock Valuation [LO1] A substantial percentage of...Ch. 8 - Stock Valuation [LO1] A substantial percentage of...Ch. 8 - Dividend Growth Model [LO1] Under what two...Ch. 8 - Common versus Preferred Stock [LO1] Suppose a...Ch. 8 - Prob. 6CRCTCh. 8 - Growth Rate [LO1] In the context of the dividend...Ch. 8 - Prob. 8CRCTCh. 8 - Prob. 9CRCTCh. 8 - Prob. 10CRCTCh. 8 - Prob. 11CRCTCh. 8 - Two-Stage Dividend Growth Model [LO1] One of the...Ch. 8 - Prob. 13CRCTCh. 8 - Price Ratio Valuation [LO2] What are the...Ch. 8 - Stock Values [LO1] The JacksonTimberlake Wardrobe...Ch. 8 - Stock Values [LO1] The next dividend payment by...Ch. 8 - Stock Values [LO1] For the company in the previous...Ch. 8 - Stock Values [LO1] Caan Corporation will pay a...Ch. 8 - Stock Valuation [LO1] Tell Me Why Co. is expected...Ch. 8 - Stock Valuation [LO1] Suppose you know that a...Ch. 8 - Stock Valuation [LO1] Estes Park Corp. pays a...Ch. 8 - Valuing Preferred Stock [LO1] Moraine, Inc., has...Ch. 8 - Prob. 9QPCh. 8 - Prob. 10QPCh. 8 - Prob. 11QPCh. 8 - Prob. 12QPCh. 8 - Stock Valuation and PS [LO2] TwitterMe, Inc., is a...Ch. 8 - Stock Valuation [LO1] Bayou Okra Farms just paid a...Ch. 8 - Prob. 15QPCh. 8 - Nonconstant Dividends [LO1] Maloney, Inc., has an...Ch. 8 - Nonconstant Dividends [LO1] Lohn Corporation is...Ch. 8 - Supernormal Growth [LO1] Synovec Co. is growing...Ch. 8 - Prob. 19QPCh. 8 - Prob. 20QPCh. 8 - Prob. 21QPCh. 8 - Valuing Preferred Stock [LO1] E-Eyes.com just...Ch. 8 - Prob. 23QPCh. 8 - Two-Stage Dividend Growth Model [LO1] A7X Corp....Ch. 8 - Two-Stage Dividend Growth Model [LO1] Navel County...Ch. 8 - Stock Valuation and PE [LO2] Summers Corp....Ch. 8 - Stock Valuation and PE [LO2] You have found the...Ch. 8 - Stock Valuation and PE [LO2] In the previous...Ch. 8 - Stock Valuation and PE [LO2] YGTB, Inc., currently...Ch. 8 - PE and Terminal Stock Price [LO2] In practice, a...Ch. 8 - Stock Valuation and PE [LO2] Fly Away, Inc., has...Ch. 8 - Prob. 32QPCh. 8 - Stock Valuation [LO1] Most corporations pay...Ch. 8 - Nonconstant Growth [LO1] Storico Co. just paid a...Ch. 8 - Nonconstant Growth [LO1] This ones a little...Ch. 8 - Constant Dividend Growth Model [LO1] Assume a...Ch. 8 - Two-Stage Dividend Growth [LO1] Regarding the...Ch. 8 - Prob. 38QPCh. 8 - Prob. 1MCh. 8 - Prob. 2MCh. 8 - What is the industry average priceearnings ratio?...Ch. 8 - Prob. 4MCh. 8 - Assume the companys growth rate slows to the...Ch. 8 - Prob. 6M
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Question 6. Suppose that the consensus forecast of security analysts of your favorite company is that earnings next year will be $5.00 per share. The company plows back 50% of its earnings and if the Chief Financial Officer (CFO) estimates that the company's return on equity (ROE) is 16%. Assuming the plowback ratio and the ROE are expected to remain constant forever: Suppose that you are confident that 10% is the required rate of return on the stock. What does the market price of $50.00 per share imply about the market’s estimate of the company’s expected return on equity? (please give a number) *Make sure to input all percentage answers as numeric values without symbols, and use four decimal places of precision. For example, if the answer is 6%, then enter 0.0600.arrow_forwardQuestion 6 Suppose that the consensus forecast of security analysts of your favorite company is that earnings next year will be $5.00 per share. The company plows back 50% of its earnings and if the Chief Financial Officer (CFO) estimates that the company's return on equity (ROE) is 16%. Assuming the plowback ratio and the ROE are expected to remain constant forever: Suppose that you are confident that 10% is the required rate of return on the stock. What does the market price of $50.00 per share imply about the market’s estimate of the company’s expected return on equity? (please give a number)arrow_forwardYou are planning to invest in common stock of Eagle, Inc. Lately, the firm paid a dividend of P7.80. You have projected that dividends will grow at a rate of 9.0% per year indefinitely. If you want an annual return of 24.0%, what is the most you should pay for the stock now? A. P52.00 B. P56.68 C. P32.50 D. P35.43arrow_forward
- Question 19 A company currently pays a dividend of R2 per share. It is estimated that the company dividend will grow at a rate of 20% per year for the next 2 years and at a constant rate of 7% thereafter. The company’s share 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 share’s current price? 1. R50,52 2. R51,08 3. R56,76 4. R58,14arrow_forwardSubject: Financial strategy & policy Question No 3 (part i) Answer the following. i) The future earnings, dividends, and common stock price of Nabeel Inc. are expected to grow 7% per year. Common stock currently sells for $23.00 per share; its last dividend was $2.00. a) Using the DCF approach, what is its cost of common equity? b) If the firm’s beta is 1.6, the risk-free rate is 9%, and the average return on the market is 13%, what will be the firm’s cost of common equity using the CAPM approach? c) If the firm’s bonds earn a return of 12%, based on the bond-yield-plus-risk-premium approach, what will be rs? d) If you have equal confidence in the inputs used for the three approaches, what is your estimate of cost of common equity?arrow_forwardConroy Consulting Corporation (CCC) has a current dividend of D0 = $2.70. Shareholders require a 10% rate of return. Although the dividend has been growing at a rate of 29% per year in recent years, this growth rate is expected to last only for another 2 years (g0,1 = g1,2 = 29%). After Year 2, the growth rate will stabilize at gL = 4%. What is CCC's stock worth today? Do not round intermediate calculations. Round your answer to the nearest cent. $ What is the expected stock price at Year 1? Do not round intermediate calculations. Round your answer to the nearest cent. $ What is the Year 1 expected (1) dividend yield, (2) capital gains yield, and (3) total return? Do not round intermediate calculations. Round your answers to two decimal places. Dividend yield: % Capital gains yield: % Total return: % What is its expected dividend yield for the second year? The expected capital gains yield? The expected total return? Do not round intermediate calculations. Round your answers to two…arrow_forward
- A firm just paid a dividend of D0 = ₱1.32. Analysts expect the company's dividend to grow by 30% this year, by 10% in Year 2, and at a constant rate of 5% in Year 3 and thereafter. The required return on this low-risk stock is 9.00%. What is the best estimate of the stock’s current market value?arrow_forward47. Sorenson Corp.'s expected year-end dividend is D1 = $1.50, its required return is rs = 15.00%, its dividend yield is 6.00%, and its growth rate is expected to be constant in the future. What is Sorenson's expected stock price in 6 years, i.e., what is P̃6? Do not round intermediate calculationsarrow_forwardSupernormal Growth (LO1) Duffs Co. is growing quickly. Dividends are expected to grow at a24% ratefor the next three years, with the growth rate falling off to a constant 6% thereafter. If the required returnis 11% and the company just paid a $1.90 dividend, what is the current share price?arrow_forward
- 1. Frostfell Airlines is expected to pay an upcoming dividend of P3.29. The company's dividend is expected to grow at a steady, constant rate of 5% well into the future. Frostfell currently has 1,600,000 shares of common stock outstanding. If the required rate of return for Frostfell is 12%, what is the best estimate for the current price of Frostfell's common stock? P65.80 P62.51 P27.41 P47.00 2. Assume that you are the financial staff of Vanderheiden Inc., and you have collected the following data: the yield on the company’s outstanding bonds is 7.75%, its tax rate is 40%, the next expected dividend is P0.65 a share, the dividend is expected to grow at a constant rate of 6.00% a year, the price of the stock is P15.00 per share, the flotation cost for selling new shares is F = 10%, and the target capital structure is 45% debt and 55% common equity. What is the firm's WACC, assuming it must issue new stock to finance its capital budget? 6.89% 7.64% 7.26% 8.04% 3.…arrow_forwardS08-19 Supernormal Growth [LO1] Mobray Corp. is experiencing rapid growth. Dividends are expected to grow at 25 percent per year during the next three years, 15 percent over the following year, and then 6 percent per year indefinitely. The required return on this stock is 10 percent, and the stock currently sells for $79 per share. What is the projected dividend for the coming year? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)arrow_forwardMa3. For the valuation of the HZ stock, the following forecast is considered the most reasonable: the company will keep up the current 20% annual growth of its dividends for two more years, and then the company will stabilized to a long-run dividend growth rate of 5% for the foreseeable future. You know that the last dividend paid on the stock is $2 per share. a. What will be your estimate of its stock value if the required return on the stock is 12%? b. Name one major problem with, or limitation of, the Discounted Dividend Model for stock valuation.arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
- Essentials Of InvestmentsFinanceISBN:9781260013924Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.Publisher:Mcgraw-hill Education,
- Foundations Of FinanceFinanceISBN:9780134897264Author:KEOWN, Arthur J., Martin, John D., PETTY, J. WilliamPublisher:Pearson,Fundamentals of Financial Management (MindTap Cou...FinanceISBN:9781337395250Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage LearningCorporate Finance (The Mcgraw-hill/Irwin Series i...FinanceISBN:9780077861759Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan ProfessorPublisher:McGraw-Hill Education
Essentials Of Investments
Finance
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:9780134897264
Author:KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:Pearson,
Fundamentals of Financial Management (MindTap Cou...
Finance
ISBN:9781337395250
Author:Eugene F. Brigham, Joel F. Houston
Publisher:Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i...
Finance
ISBN:9780077861759
Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:McGraw-Hill Education
Dividend explained; Author: The Finance Storyteller;https://www.youtube.com/watch?v=Wy7R-Gqfb6c;License: Standard Youtube License