FIN 200 WK5 DAY 4 – Stock Valuations
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 (D0) 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
(D0) 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
4. 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 (D0). 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?
6. The chairman of Heller 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…