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?

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

- Estimate the compound annual dividend growth rate over the 6-year period.

- Assuming the forecasted growth rate will go on forever, how much is this stock worth today if investors require an 18% rate of return?
- 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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