Purchase Solution

Stock Valuation

Not what you're looking for?

Ask Custom Question

I am having all kinds of trouble with stock valuations. I have read my chapter material twice, but cannot figure the attached problems. Also, if this is calculated in excel, how to calculate?

1.

General Cereal common stock dividends have been growing at an annual rate of 7 percent per year over the past 10 years. Current dividend (D o) is 1.70 per share. What is the current value of a share of this stock to an investor who requires a 12 percent rate of return if the following conditions exist?

a. Dividends are expected to continue growing at the historic rate for the foreseeable future.
b. The dividend growth rate is expected to increase to 9 percent per year.
c. The dividend growth rate is expected to decrease to 6.5 percent per year.

2.

The Foreman Company's earnings and common stock dividends have been growing at an annual rate of 6 percent over the past 10 years and are expected to continue growing at this rate for the foreseeable future. The firm currently (D o) pays an annual dividend of $5 per share. Determine the current value of a share of Foreman common stock to investors with each of the following required rates of return:

a. 12 percent
b. 14 percent
c. 16 percent
d. 6 percent
e. 4 percent

3.

Over the past 5 years, the dividends of the Gamma Corporation have grown from $0.70 per share to the current level of $1.30 per share (D o). This growth rate is expected to continue for the foreseeable future. What is the value of a share of Gamma Corporation common stock to an investor who requires a 20 percent return on an investment?

4.

The chairman of Hellerman Industries told a meeting of financial analysts that he expects the firm's earnings and dividends to double over the next 6 years. The firm's current (that is, as of year 0) earnings and dividends per share are $4 and $2, respectively.

a. Estimate the compound annual dividend growth rate over the 6-year period.
b. Assuming the forecasted growth rate in (a) will go on forever, how much is this stock worth today if investors require an 18 percent rate of return?
c. Why might the stock price calculated in (b) not represent an accurate valuation to an investor with 18 percent required of return?

11.

The Kummins Engine Company common stock has a beta of 0.9. The current risk-free rate of return is 5 percent and the market risk premium is 8 percent. The CEO of the company is quoted in a press release as saying that the firm will pay a dividend $0.80/share in the coming year and expects the dividends to grow at a constant rate of 7 percent for the foreseeable future. Using the constant growth model, what value would you assign to this stock?

Purchase this Solution

Solution Summary

The solution answers the question below and goes into quite a bit of detail regarding Stock Valuation. The answer is ideal for students looking for a detailed analysis of the question asked below. An excellent response to the question being asked.

Purchase this Solution


Free BrainMass Quizzes
Organizational Behavior (OB)

The organizational behavior (OB) quiz will help you better understand organizational behavior through the lens of managers including workforce diversity.

Marketing Management Philosophies Quiz

A test on how well a student understands the basic assumptions of marketers on buyers that will form a basis of their marketing strategies.

Introduction to Finance

This quiz test introductory finance topics.

Understanding the Accounting Equation

These 10 questions help a new student of accounting to understand the basic premise of accounting and how it is applied to the business world.

Managing the Older Worker

This quiz will let you know some of the basics of dealing with older workers. This is increasingly important for managers and human resource workers as many countries are facing an increase in older people in the workforce