ASSIGNMENT (CHAPTER 7):
13. Nonconstant Growth. (Learning Objective1).
Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on the stock over the next nine years because the firm needs to plow back its earnings to fuel growth. The company will then pay a $12 per share dividend in year 10 and will increase the dividend by 5 percent per year thereafter. If the required return on this stock is 13 percent, what is the current share price?
14. Nonconstant Dividends. (Learning Objective 1).
Hot Wings, Inc., has an odd dividend policy. The company has just paid a dividend of $8 per share and has announced that it will increase the dividend by $6 per share for each of the next four years, and then never pay another dividend. If you require a 14 percent return on the company’s stock, how much will you pay for a share today?
16. Supernormal Growth. (Learning Objective 1).
Taylor Corp. is growing quickly. Dividends are expected to grow at a 30 percent rate for the next three years, with the growth rate falling off to a constant 6 percent thereafter. If the required return is
13 percent and the company just paid a $2.75 dividend, what is the current share price? Hint:
Calculate the first four dividends