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Current Price of Stock, WACC

The last dividend paid by a company was $2.20. Klein's growth rate is expected to be 10 percent for one year, after which dividends are expected to grow at a rate of 6 percent forever. The company's stockholders require a rate of return on equity (rs) of 11 percent. What is the current price of the stock?

a. $44.00
b. $46.64
c. $48.40
d. $48.64
e. $50.40

An analyst has collected the following information regarding Christopher Co.:

? The company's capital structure is 70 percent equity, 30 percent debt.
? The yield to maturity on the company's bonds is 9 percent.
? The company's year-end dividend is forecasted to be $0.80 a share.
? The company expects that its dividend will grow at a constant rate of 9 percent a year.
? The company's stock price is $25.
? The company's tax rate is 40 percent.
? The company anticipates that it will need to raise new common stock this year. Its investment bankers anticipate that the total flotation cost will equal 10 percent of the amount issued. Assume the company accounts for flotation costs by adjusting the cost of capital. Given this information, calculate the company's WACC.

a. 10.41%
b. 12.56%
c. 10.78%
d. 13.55%
e. 9.29%

Solution Preview

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The last dividend paid by a company was $2.20.  Klein's growth rate is expected to be 10 percent for one year, after which dividends are expected to grow at a rate of 6 percent forever.  The company's stockholders require a rate of return on equity (rs) of 11 percent.  What is the current price of the stock?

a. $44.00
b. $46.64
c. $48.40
d. $48.64
e. $50.40

Answer: c. $48.40

Div0 = $2.20
Div1 = $2.42 =2.20*(1+10%)
Div2 = $2.5652 =2.42*(1+6%)

P2= Div1/ (r-g)

Dividend for 2nd year= Div2 = $2.5652
Cost of equity= r= 11%
growth rate of ...

Solution Summary

The solution answers 2 questions one relating to Current Price of Stock, the other to WACC

$2.19