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    Constant Growth Rate

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    1. Krell Industries has a share price of $22 today. If Krell is expected to pay a dividend of $0.88 this year, and its stock price is expected to grow to $23.54 at the end of the year, what is Krell's dividend yield and equity cost of capital?

    2. Dorpac Corporation has a dividend yield of 1.5%. Dorpac's equity cost of capital is 8%, and its dividends are expected to grow at a constant rate.

    a) What is the expected growth rate of Dorpac's dividends?
    b) What is the expected growth rate of Dorpac's share price?

    3. Suppose Cisco Systems pays no dividends but spent $5 billion on share repurchases last year. If Cisco's equity cost of capital is 12%, and if the amount spent on repurchases is expected to grow by 8% per year, estimate Cisco's market capitalization. If Cisco has 6 billion shares outstanding what stock price does this correspond to?

    4. In early 2009, Coca-Cola Company had a share price of $46. Its dividend was $1.52, and you expect Coca-Cola to raise this dividend by approximately 7% per year in perpetuity.

    a) If Coca-Cola equity cost of capital is 8%, what share price would you expect bases on your estimate of the dividend growth rate?

    b) Given Coca-Cola's share price, what would you conclude about your assessment of Coca-Cola's future dividend growth?

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    Solution Preview

    1. Dividend Yield = D1/P0 = 0.88/22 = 4%
    Equity cost of capital = Dividend yield + capital gains yield
    Capital gains yield = (23.54-22)/22 = 7%
    Equity cost of capital = 4%+7% = 11%

    2. a) Expected growth rate of dividends = Equity cost of ...

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