1. Company Z-primes earnings and dividends per share are expected to grow by 5% a year. Its growth will stop after year 4. In year 5 and afterward, it will pay out all earnings as dividends. Assume next years dividend is $10, the market capitalization rate is 8% and next years EPS is $15. What is Z-primes stock price? 2. Consider the following three stocks: a. Stock A is expected to provide a dividend of $10 a share forever. b. Stock B is expected to pay a dividend of $5 next year. Thereafter, dividend growth is expected to be 4% a year forever. c. Stock C is expected to pay a dividend of $5 next year. Thereafter, dividend growth is expected to be 20% a year for five years (i.e., until year 6) and zero thereafter. a-1. If the market capitalization rate for each stock is 10%, what is the stock price for each of the stocks? (Do not round intermediate calculations. Round your answers to 2 decimal places.) Stock Price Stock A $ Stock B $ Stock C $ a-2. Which stock is the most valuable? Stock A Stock B Stock C b-1. If the market capitalization rate for each stock is 7%, what is the stock price for each of the stocks? (Do not round intermediate calculations. Round your answers to 2 decimal places.) Stock Price Stock A $ Stock B $ Stock C $ b-2. Which stock is the most valuable? Stock A Stock B Stock C 3. Permian Partners (PP) produces from aging oil fields in west Texas. Production is 1.8 million barrels per year in 2013, but production is declining at 7% per year for the foreseeable future. Costs of production, transportation, and administration add up to $25 per barrel. The average oil price was $65 per barrel in 2013. PP has 7 million shares outstanding. The cost of capital is 9%. All of PPs net income is distributed as dividends. For simplicity, assume that the company will stay in business forever and that costs per barrel are constant at $25. Also, ignore taxes. a. Assume that oil prices are expected to fall to $60 per barrel in 2014, $55 per barrel in 2015, and $50 per barrel in 2016. After 2016, assume a long-term trend of oil-price increases at 5% per year. What is the PV of a PP share? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Present value per share $ b-1. What is PPs EPS/P ratio? (Do not round intermediate calculations. Round your answer to 2 decimal places.) EPS/P ratio b-2. Is it equal to the 9% cost of capital? Yes No