fin homework 7

2. See the following basic examples before doing the assignment.

Ch 9 Examples_page1.pdf

Ch 9 Examples_page2.pdf

Ch 9 Examples_page3.pdf

Ch 9 Examples_page4.pdf

Assignment problems (You must show all your work to get a full credit)

a) A firm just paid a $1.5 dividend per share today. If the required rate of return is 12% and the dividend is expected to grow at a constant rate of 4%, what is the stock price today?

b) A firm is expected to pay $2 dividend per share next year and the dividend growth rate is 8%. Find the future dividends from year 2 to year 5, that is, D2, D3, D4, and D5.

c) A firm is expected to pay $1,6 dividend per share next year. The dividend is expected to grow at a 30% for 2 years and thereafter, decline and stay at a constant rate of 5%. Find the stock price today.

d) A firm is expected to produce $50 million free cash flow next year. The WACC is 10% and the free cash flow is expected to grow at a constant rate of 3%. The firm has $20 million debt and $5 million preferred stock. If the number of common shares is 40 million, what is the stock (common share) price today?

e) A firm has perpetual preferred stock outstanding with a par value of $10. The preferred stock pays $2.8 annual dividend and its price today is $35. What is the required rate of return on the preferred stock?

f) A firm’s stock price today is $30. The next year’s dividend is expected to be $1.2 per share and the required rate of return on the stock is 9%. Find the dividend constant growth rate.

g) If a firm’s cash flows becomes more risky, then, the required rate of return on its stock is likely to increase because investors will required more risk premium for the firm. Now, assume that the firm’s stock valuation exactly follows the constant growth model: P0 = D1/(r – g)

When the firm’s dividend growth rate (g) increases, if the stock price decreases instead of increasing, how can you explain this in terms of the riskiness of the firm’s cash flows?

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