General Cereal common stock dividends have been growing at an annual rate of 7 percent per year over the past 10 years. Current dividends are $1.70 per share Answer

1) General Cereal common stock dividends have been growing at an annual rate of 7 percent per year over the past 10 years. Current dividends are $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?

  1. Dividends are expected to continue growing at the historic rate for the foreseeable future.
  2. The dividends growth rate is expected to increase to a 9 percent per year.
  3. The dividends 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 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:

12 percent

14 percent

16 percent

6 percent

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. 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 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.

  1. Estimate the compound annual dividend growth rate over the 6-year period.
  1. Assuming the forecasted growth rate will go on forever, how much is this stock worth today if investors require an 18% rate of return?
  2. Why might the stock price calculated in not represent an accurate valuation to an investor with an 18% required rate of return?

 

9) Calculate the book value per share based on the reported stockholder’s equity account for Bridgford Foods in fiscal year ending November 2, 2005:

Shareholder’s equity –

(‘ 000) Preferred stock, without par value

Authorized — 1,000 shares

Issued and outstanding –none Common stock, $1.00 pr value —

$10,505 Capital in excess of par value —                                   17,475

Retained Earnings —                                                    29,355

Total Shareholder’s equity —                                       $57,335

11) The Kummins Engine Company common stock has a beta of 0.9. The current risk-free rate of return is 5 percent and the market risk premium is 6 percent. The CEO of the company is quoted in a press release as saying that the firm will pay a dividend of $1.80/share in the coming year and expects the dividends to grow at a constant rate of 6 percent for the foreseeable future. Using the constant growth model, what value would you assign to this stock?

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