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Current stock price

I need to verify solutions for the following problems. Please help. Thank you very much!

1. United Industries is about to pay a dividend of $1.35 per share. It's a mature company but future EPS and dividends are expected to grow with inflation, which is forecasted at 2.75% per year.

A. What is United Industries' current stock price if the Nominal cost of capital is 9.5%?
B. What is the stock price is the inflation forecast changes to 4%?

2. An oil company is drilling a series of new wells on an oil field. About 20% of the new wells will be dry holes. Even if a new well strikes oil, there is uncertainty about the amount of oil produced because 40% of new wells that strike oil produce 1,000 barrels a day and 60% produce 5,000 barrels per day.

A. Forecast the annual cash revenues from a new oil well on this project using a price of $15 per barrel.
B. What if the price were $25 per barrel?
C. Based on $15 per barrel, would this project show a positive NPV after 5 years based on an initial investment of $50,000,000 with a discount rate of 10%?

Solution Preview

** See ATTACHED file(s) for complete details **

which is forecasted at 2.75% per year.

A. What is United Industries' current stock price if the Nominal cost of capital is 9.5%?

Stock price = Next year dividend/(Cost of equity-growth)
(1.35*1.0275)/(9.5%-2.75%)
$20.55

B. What is the stock price is the inflation forecast changes to 4%?

Stock price = Next year dividend/(Cost of equity-growth)
(1.35*1.04)/(9.5%-4%)
$25.53

2. An oil company is ...

Solution Summary

Response provides the steps to calculate the current stock price

$2.19