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# Stock price

1. Prock Petroleum's stock has a required return of 13%, and the stock sells for \$50 per share. The firm just paid a dividend of \$1.00, and the dividend is expected to grow by 30% per year for the next 4 years, so D4 = \$1.00(1.30)4 = \$2.8561. After t = 4, the dividend is expected to grow at a constant rate of X% per year forever. What is the stock's expected constant growth rate after t = 4, i.e., what is X?

2 Sorenson Corp.'s expected year-end dividend is D1 = \$1.50, its required return is rS = 12.00%, its dividend yield is 8.00%, and its growth rate is expected to be constant in the future. What is Sorenson's expected stock price in 7 years, i.e., what is P7?

3. You have been assigned the task of using the free cash flow model to estimate Petry Corporation's intrinsic value. Petry's WACC is 10.00%, its end-of-year free cash flow (FCF) is expected to be \$150.0 million, the FCFs are expected to grow at a constant rate of 6.00% a year in the future, the company has \$200 million of long-term debt plus preferred stock, and it has 50 million shares of common stock outstanding. What is Petry's estimated intrinsic value per share of common stock?

#### Solution Preview

1. Prock Petroleum's stock has a required return of 13%, and the stock sells for \$50 per share. The firm just paid a dividend of \$1.00, and the dividend is expected to grow by 30% per year for the next 4 years, so D4 = \$1.00(1.30)^4 = \$2.8561. After t = 4, the dividend is expected to grow at a constant rate of X% per year forever. What is the stock's expected constant growth rate after t = 4, i.e., what is X?

Current share price is the discounted value of all the dividends

r= 13%

Year Dividend growth rate Dividend
0 D0 \$1.000
1 D1 30% \$1.3000 =( 1 + 30.% ) x \$1.
2 D2 30% \$1.6900 =( 1 + 30.% ) x \$1.3
3 D3 30% \$2.1970 =( 1 + 30.% ) x \$1.69
4 D4 30% \$2.8561 =( 1 + 30.% ) x \$2.197

Step 1: Find the present value of dividends in years 1-4

Year =PV factor @ 13.% Discounted value
1 D1= \$1.3000 0.8850 \$1.1505 =0.885 x 1.3
2 D2= \$1.6900 0.7831 \$1.3234 =0.7831 x 1.69
3 D3= \$2.1970 0.6931 \$1.5227 =0.6931 x 2.197
4 D4= \$2.8561 0.6133 \$1.7516 =0.6133 x 2.8561
Total= \$5.7482

Therefore present value of dividends in years 1-4= \$5.7482

Current share price= \$50.00

Therefore present value of ...

#### Solution Summary

Calculates the expected constant growth rate in stock price and the stock price.

\$2.19