Stock valuation

Stock valuation
1. TechWorld Ltd is expecting to pay out a dividend of $2.50 next year. After that it expects its
dividend to grow at 7 percent for the next four years. What is the present value of dividends
over the next five-year period if the required rate of return is 10 percent?
a. $10.75
b. $9.80
c. $11.88
d. $11.50
2. BlackSteel Manufacturing Company has been generating stable revenues but sees no growth
in it for the foreseeable future. The company’s last dividend was $3.25, and it is unlikely to
change the amount paid out. If the required rate of return is 12 percent, what is the share
worth today?
a. $39.00
b. $3.69
c. $27.08
d. $21.23
3. You are interested in investing in a company that expects to grow steadily at an annual rate of
6 percent for the foreseeable future. The company paid a dividend of $2.30 last year. If your
required rate of return is 10 percent, what is the most you would be willing to pay for this
share? (Round to the nearest dollar.)
a. $58
b. $61
c. $23
d. $24
4. Ajax Company has issued perpetual preference shares with a par of $100 and a dividend of
5.5 percent. If the required rate of return is 7.75 percent, what is the share’s current market
price?
a. $12.90
b. $70.97
c. $53.27
d. $62.14
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9.1 Ted McKay has just bought ordinary shares of Ryland Pty Ltd. The company expects
to grow at the following rates for the next 3 years: 30 per cent, 25 per cent, and 15 per
cent. Last year the company paid a dividend of $2.50. Assume a required rate of
return of 10 per cent. Calculate the expected dividends for the next 3 years and also
the present value of these dividends.
9.2 Centrogen Manufacturing Pty Ltd has been growing at a rate of 6 per cent for the past
2 years, and the company’s CEO expects the company to continue to grow at this rate
for the next several years. The company paid a dividend of $1.20 last year. If your
required rate of return was 14 per cent, what is the maximum price that you would be
willing to pay for this company’s shares?
9.3 Clarion Australia Pty Ltd has been selling electrical supplies for the past 20 years. The
company’s product line has seen very little change in the past 5 years, and the
company does not expect to add any new items for the foreseeable future. Last year,
the company paid a dividend of $4.45 to its ordinary shareholders. The company is
not expected to grow its revenues for the next several years. If your required rate of
return for such companies is 13 per cent, what is the current value of this company’s
shares?
9.4 Cooper Communications Pty Ltd is a fast-growing communications company. The
company did not pay a dividend last year and is not expected to do so for the next 2
years. Last year the company’s growth accelerated, and they expect to grow at a rate
of 35 per cent for the next 5 years before slowing down to a more stable growth rate
of 7 per cent for the next several years. In the third year, the company has forecasted a
dividend payment of $1.10. Calculate the share price of the company at the end of its
rapid growth period (that is, at the end of 5 years). Your required rate of return for
such shares is 17 per cent. What is the current price of these shares?
9.5 Cofield Pty Ltd is expected to grow at a constant rate of 7 per cent. If the company’s
next dividend is $1.15 and its current price is $22.35, what is the required rate of
return on this share?
9.6 Central Energy Pty Ltd has issued perpetual preference shares with a par of $100 and a
dividend of 4.5 per cent. If the required rate of return is 8.25 per cent, what is the
share’s current market price?
9.7 Each 6 months, Barossa Valley Brewing Pty Ltd pays a dividend on its perpetual
preference shares. Today, the share is selling at $63.37. If the required rate of return
for such shares is 15.5 per cent, what is the 6-monthly dividend paid by this
company?
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9.14 Kay Williams is interested in purchasing the ordinary shares of Vasse Felix Pty Ltd
which is currently priced at $37.45. The company expects to pay a dividend of $2.58
next year and expects to grow at a constant rate of 7 per cent.
a. What should the market value of the share be if the required rate of return is 14
per cent?
b. Is this a good buy? Why or Why not?
9.15 Your required rate of return is 23 per cent. Gnangara Pty Ltd has just paid a dividend
of $3.12 and expects to grow at a constant rate of 5 per cent. What is the expected
price of the share 3 years from now?
9.30 Comwin Pty Ltd is expanding very fast and expects to grow at a rate of 25 per cent for
the next 4 years. The company recently declared a dividend of $3.60 but does not
expect to pay any dividends for the next 3 years. In year 4, they intend to pay a $5
dividend and thereafter grow it at a constant-growth rate of 6 per cent. The required
rate of return on such shares is 20 per cent.
a. Calculate the present value of the dividends during the fast growth period.
b. What is the price of the share at the end of the fast growth period (P4)?
c. What is the share price today?
d. Would today’s share price be driven by the length of time you intend to hold
the share?
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