CORPORATE FINANCE CUSTOM W/CONNECT >BI
11th Edition
ISBN: 9781307036633
Author: Ross
Publisher: MCG/CREATE
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Textbook Question
Chapter 9, Problem 32QP
Nonconstant Growth This one’s a little harder. Suppose the current share price for the firm in the previous problem is $62.40 and all the dividend information remains the same. What required return must investors be demanding on Storico stock? (Hint: Set up the valuation formula with all the relevant cash flows, and use trial and error to find the unknown
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Students have asked these similar questions
Expected returns, dividends, and growth
The constant growth valuation formula has dividends in the numerator. Dividends are divided by the difference between the required return and dividend growth rate as follows:
Pˆ0
=
D1(rs – g)
Which of the following statements is true?
Increasing dividends may not always increase the stock price, because less earnings may be invested back into the firm and that impedes growth.
Increasing dividends will always increase the stock price.
Increasing dividends will always decrease the stock price, because the firm is depleting internal funding resources.
Walter Utilities is a dividend-paying company and is expected to pay an annual dividend of $2.05 at the end of the year. Its dividend is expected to grow at a constant rate of 6.50% per year. If Walter’s stock currently trades for $28.00 per share, what is the expected rate of return?
13.82%
656.87%
992.14%…
The dividend-growth model,
suggests that an increase in the dividend growth rate will increase the value of a stock. However, an increase in the growth may require an increase in retained earnings and a reduction in the current dividend. Thus, management may be faced with a dilemma: current dividends versus future growth. As of now, investors’ required return is 12 percent. The current dividend is $0.9 a share and is expected to grow annually by 8 percent, so the current market price of the stock is $24.3. Management may make an investment that will increase the firm’s growth rate to 9 percent, but the investment will require an increase in retained earnings, so the firm’s dividend must be cut to $0.4 a share. Should management make the investment and reduce the dividend? Round your answer to the nearest cent.
The value of the stock to $ , so the management make the investment and decrease the dividend.
[multiple choice questions]
INDO Inc. always pays all of its earnings as dividends, and therefore has no retained earnings. The same situation is expected to persist in the future. The company uses the CAPM to calculate its cost of equity. The targeted capital structure consists of: common stock, preferred stock, and debt. Which of the following events will reduce WACC?
a. The market risk premium is decreasing.
b. Flotation costs associated with issuing new common stock increase.
c. The company's beta is increasing.
d. Inflation is expected to increase.
e. The flotation costs associated with issuing preferred stock increase.
Chapter 9 Solutions
CORPORATE FINANCE CUSTOM W/CONNECT >BI
Ch. 9 - Stock Valuation Why does the value of a share of...Ch. 9 - Stock Valuation A substantial percentage of the...Ch. 9 - Dividend Policy Referring to the previous...Ch. 9 - Prob. 4CQCh. 9 - Common versus Preferred Stock Suppose a company...Ch. 9 - Dividend Growth Model Based on the dividend growth...Ch. 9 - Growth Rate In the context of the dividend growth...Ch. 9 - Price-Earnings Ratio What are the three factors...Ch. 9 - Prob. 9CQCh. 9 - Prob. 10CQ
Ch. 9 - Stock Values The Starr Co. just paid a dividend of...Ch. 9 - Stock Values The next dividend payment by ECY,...Ch. 9 - Stock Values For the company in the previous...Ch. 9 - Stock Values Shiller Corporation will pay a 2.75...Ch. 9 - Stock Valuation Siblings, Inc., is expected to...Ch. 9 - Stock Valuation Suppose you know that a companys...Ch. 9 - Stock Valuation Gruber Corp. pays a constant 9...Ch. 9 - Valuing Preferred Stock Ayden, Inc., has an issue...Ch. 9 - Growth Rate The newspaper reported last week that...Ch. 9 - Stock Valuation and PE The Spring Flower Co. has...Ch. 9 - Stock Valuation Universal Laser, Inc., just paid a...Ch. 9 - Nonconstant Growth Metallica Bearings, Inc., is a...Ch. 9 - Nonconstant Dividends Bucksnort, Inc., has an odd...Ch. 9 - Nonconstant Dividends Lohn Corporation is expected...Ch. 9 - Differential Growth Phillips Co. is growing...Ch. 9 - Differential Growth Synovec Corp. is experiencing...Ch. 9 - Negative Growth Antiques R Us is a mature...Ch. 9 - Finding the Dividend Mau Corporation stock...Ch. 9 - Valuing Preferred Stock Fifth National Bank just...Ch. 9 - Using Stock Quotes You have found the following...Ch. 9 - Nonconstant Growth and Quarterly Dividends...Ch. 9 - Finding the Dividend Briley, Inc., is expected to...Ch. 9 - Finding the Required Return Juggernaut Satellite...Ch. 9 - Dividend Growth Four years ago, Bling Diamond,...Ch. 9 - Prob. 25QPCh. 9 - Stock Valuation and PE Ramsay Corp. currently has...Ch. 9 - Stock Valuation and EV FFDP Corp. has yearly sales...Ch. 9 - Stock Valuation and Cash Flows Fincher...Ch. 9 - Capital Gains versos Income Consider four...Ch. 9 - Stock Valuation Most corporations pay quarterly...Ch. 9 - Nonconstant Growth Storico Co. just paid a...Ch. 9 - Nonconstant Growth This ones a little harder....Ch. 9 - Growth Opportunities The Stambaugh Corporation...Ch. 9 - Growth Opportunities Burklin, Inc., has earnings...Ch. 9 - Prob. 1MCCh. 9 - Prob. 2MCCh. 9 - Prob. 3MCCh. 9 - Assume the companys growth rate declines to the...Ch. 9 - Assume the companys growth rate slows to the...Ch. 9 - Prob. 6MC
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- suggests that an increase in the dividend growth rate will increase the value of a stock. However, an increase in the growth may require an increase in retained earnings and a reduction in the current dividend. Thus, management may be faced with a dilemma: current dividends versus future growth. As of now, investors’ required return is 9 percent. The current dividend is $1.3 a share and is expected to grow annually by 4 percent, so the current market price of the stock is $27.04. Management may make an investment that will increase the firm’s growth rate to 5 percent, but the investment will require an increase in retained earnings, so the firm’s dividend must be cut to $0.9 a share. Should management make the investment and reduce the dividend? Round your answer to the nearest cent. The value of the stock to $ , so the management make the investment and decrease the dividend.arrow_forwardKirby Enterprises’s stock is currently selling for $32.45 per share, and the firm expects its per-share dividend to be $2.35 in one year. Analysts project the firm’s growth rate to be constant at 7.27%. Estimating the cost of equity using the discounted cash flow (or dividend growth) approach, what is Kirby’s cost of internal equity? 14.51% 13.78% 18.14% 19.59% Estimating growth rates It is often difficult to estimate the expected future dividend growth rate for use in estimating the cost of existing equity using the DCF or DG approach. In general, there are three available methods to generate such an estimate: • Carry forward a historical realized growth rate, and apply it to the future. • Locate and apply an expected future growth rate prepared and published by security analysts. • Use the retention growth model. Suppose Kirby is currently distributing 75% of its earnings in the form of cash dividends. It has also historically…arrow_forwardInfinite growth is a problem with the dividend discount model because: Seleccione una: a. Dividend growth rates eventually become very small b. The statement is incorrect as infinite growth is not a problem with the dividend discount model because at reasonably high discount rates, such as 12 percent, dividends received in the distant future are worth very little today c. The expected stream of dividends is infinite d. At reasonably high discount rates, such as 12 percent, dividends received in the distant future (40 or 50 years from now) are worth very little todayarrow_forward
- XYZ company has just paid a dividend of $1.15. The required rate of return on the stock is 13.4%, and investors expect the dividend to grow at a constant 8% in the future. Calculate the current stock value using the Gordon Constant growth model. [Note: you are supposed to show every step of your calculation and interpret the result.] Evaluate Gordons growth model and explain its limitations and why in certain situations the growth model used in part (a) will create incorrect results? [Note: remember to use Harvard referencing to reference your sources]arrow_forwardS. Bouchard and Company hired you as a consultant to help estimate its cost of capital. You have obtained the following data: D0 = $0.85; P0 = $22.00; and g = 6.00% (constant). The CEO thinks, however, that the stock price is temporarily depressed, and that it will soon rise to $34.00. Based on the DCF approach, by how much would the cost of equity from retained earnings change if the stock price changes as the CEO expects? Do not round your intermediate calculations.arrow_forwardUse the following forecasted financials: (Certain cells were left intentionally blank by asker) You may need to use the CAPM model. Assume beta equals 1.09, the risk-free rate is 1.62%, and the market risk premium is 4.72%. d) Calculate the terminal value and the present value of the terminal value. Assume a long-term growth rate of 3%. e) Calculate Sherwin Williams value per share. The company has 263.3 million shares outstanding.arrow_forward
- An investment analyst estimates the following probabilities of return depending on the state of the economy. Business conditions Boom Good Normal Recession Poor Probability 0.05 0.25 0.40 0.25 0.05 Petronas share return % 12 10 4 -2 -7 Maxis share return % 26 12 8 -6 -22 Berjaya share return % 41 23 12 -27 -55 Compute the expected rate of return and Expected risk of the above shares What are their Shape Ratios?arrow_forwardUse the dividend growth or Gordon model to develop the cost of new common stock if last year's dividend was $2.25, the anticipated constant growth rate is 5% the stock's selling price today is $36 per share, and flotation costs are estimated to be 11%? (The answer choice without supporting calculation will not earn any points).arrow_forwardThe Gordon Growth Model or dividend discounting model assumes the following conditions: · The company’s business model is stable; i.e. there are no significant changes in its operations · The company grows at a constant, unchanging rate · The company has stable financial leverage · The company’s free cash flow is paid as dividends Based on the assumptions, fill up the gaps in the following table. You are expected to show detailed calculations where necessary. Stock Current Year dividend Expected growth in dividends Required rate of return Value of a share of stock A RM1.00 3% 5% B 4% 6% RM26.00 C RM1.00 10% RM21.00 D RM0.75 2% RM7.650 E RM1.10 4% 10%…arrow_forward
- Samuel Inc., hired you as a consultant to help estimate its cost of capital. You have obtained the following data: D0 = $0.85; P0 = $22.00; and g = 6.00% (constant). The CEO thinks, however, that the stock price is temporarily depressed, and that it will soon rise to $34.00. Based on the DCF approach, by how much would the cost of equity from retained earnings change if the stock price changes as the CEO expects? Do not round your intermediate calculations.arrow_forwardthe dividend growth model may be use to value a stock v=Do(1+g) k-g a. what is the value of a stock if: Do=$2 k==10% g=6% b. what is the value of this stock if the dividend is increased to $3 and the other variables remain constant? c. what is the value os this stock if the required return decline to 7.5 percent and the other variables remain constant? d. what is the value of this stock if the growth rate declines to 4 percent and the other variables remin constant? e. what is the value of this stock if the dividend is increased to $2.30, the growth rate declines to 4 percent, and the required return remains 10 percent?arrow_forwardXYZ company has just paid a dividend of $1.15. The required rate of return on the stock is 13.4%, and investors expect the dividend to grow at a constant 8% in the future. Calculate the current stock value using the Gordon Constant growth model. [Note: you are supposed to show every step of your calculation and interpret the result.] Evaluate Gordons growth model focusing on its limitations and why in certain situations this growth model will create incorrect results? [Note: remember to use Harvard referencing to reference your sources]arrow_forward
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