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1. Rearden Steel is expected to pay a $3.00 dividend next year. Dividends are
expected to grow at 10% for the foreseeable future. If the discount rate for
Rearden stock is 15%, what is the price per share for Rearden stock?
4. Now suppose that Taggart has the opportunity to build a new engine. The project
will need $10M so Taggart will not pay a dividend next year. The new engine
will increase Taggart's earnings by $2m per year starting next year. What is P0 ?
5. Ed's Bait Shoppe had earnings this year of $5,000,000. From this it paid out
$3,000,000 in dividends. This payout is representative of its typical dividend
policy. You think Ed’s earnings will grow at 4% annually. The discount rate
applied to its stock is 15%. How much would you be willing to pay for a share if
there are 15 million shares outstanding?
Equity Questions Comm 308
0
1
2
3
4
5 -$30.00
6 7.00
7 7.00
8 7.00
9 7.00
10 7.00
11 7.00
12 7.00
13 7.00
14 7.00
15 7.00
b. Mr. Archer agrees with Mr. Lestat that next year's earnings per share will
be $10. Further, he believes that next year's dividend will be $8 per share.
He disagrees with Mr. Lestat about the expansion projects. He does not
have any particular ideas about any expansion, but believes that the
dividend will grow at 3% for the foreseeable future. How much is Mr.
Archer willing to pay for a share? (Recall, r=10%.)
7. Currently Featherstone Industries has earnings per share of $5.00 and 1 million
shares outstanding. It has a policy of paying out all of its earnings as dividends.
H. Rumpole Investors believes that Featherstone is about to take on an investment
opportunity that will cost $10,000,000 next year and generate cash flows of
$2,500,000 per year for 5 years beginning 2 years from now. How much would
Rumpole be willing to pay for Featherstone? (r = 10%)
Equity Questions Comm 308