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Chapter 7 Tutorial Equity Valuation

This document contains 11 tutorial problems about calculating stock prices and required returns based on given dividend growth rates, required rates of return, and other financial metrics. The problems cover calculating stock prices based on constant dividend growth rates, determining required rates of return given stock prices and dividend yields, and estimating stock prices using price-earnings ratios and price-sales ratios.

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Seyyara Hasanova
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Download as DOCX, PDF, TXT or read online on Scribd
96 views

Chapter 7 Tutorial Equity Valuation

This document contains 11 tutorial problems about calculating stock prices and required returns based on given dividend growth rates, required rates of return, and other financial metrics. The problems cover calculating stock prices based on constant dividend growth rates, determining required rates of return given stock prices and dividend yields, and estimating stock prices using price-earnings ratios and price-sales ratios.

Uploaded by

Seyyara Hasanova
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Chapter 7 Tutorial

1. Anton, Inc., just paid a dividend of $1.95 per share on its stock. The dividends are expected to grow at
a constant rate of 4.1 percent per year, indefinitely. If investors require a return of 10.2 percent on this
stock, what is the current price? What will the price be in three years? In 15 years?
2. The next dividend payment by Wyatt, Inc., will be $2.30 per share. The dividends are anticipated to
maintain a growth rate of 4.5 percent forever. If the stock currently sells for $39.85 per share, what is
the required return?
3. For the company in the previous problem, what is the dividend yield? What is the expected capital
gains yield?
4. Nofal Corporation will pay a $3.65 per share dividend next year. The company pledges to increase its
dividend by 5.1 percent per year, indefinitely. If you require a return of 12 percent on your investment,
how much will you pay for the company's stock today?
5. Raffalovich, Inc., is expected to maintain a constant 4.9 percent growth rate in its dividends,
indefinitely. If the company has a dividend yield of 5.7 percent, what is the required return on the
company's stock?
6. Suppose you know that a company's stock currently sells for $58 per share and the required return on
the stock is 12 percent. You also know that the total return on the stock is evenly divided between
capital gains yield and dividend yield. If it's the company's policy to always maintain a constant growth
rate in its dividends, what is the current dividend per share?
7. Bui Corp. pays a constant $12 dividend on its stock. The company will maintain this dividend for the
next nine years and will then cease paying dividends forever. If the required return on this stock is 10
percent, what is the current share price?
8. Rabie, Inc., has an issue of preferred stock outstanding that pays a $3.80 dividend every year, in
perpetuity. If this issue currently sells for $78.45 per share, what is the required return?
9. The stock price of Webber Co. is $68. Investors require an 11 percent rate of return on similar stocks.
If the company plans to pay a dividend of $3.85 next year, what growth rate is expected for the
company's stock price?
10. Alexander Corp. will pay a dividend of $2.72 next year. The company has stated that it will maintain a
constant growth rate of 4.5 percent a year forever. If you want a return of 12 percent, how much will
you pay for the stock? What if you want a return of 8 percent? What does this tell you about the
relationship between the required return and the stock price?
11. The Sleeping Flower Co. has earnings of $1.75 per share. The benchmark PE for company is 18. What
stock price would you consider appropriate? What if the benchmark PE were 21?
12. TwitterMe, Inc., is a new company and currently has negative earnings. The company's sales are $1.2
million and there are 130,000 shares outstanding. If the benchmark price-sales ratio is 5.2, what is your
estimate of an appropriate stock price? What if the price-sales ratio were 4.6?

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