4-25 A company recently announced an increase of their quarterly dividend from

$.05 to $.06 per share. This continued a long string of double digit percentage

increases in dividends. Suppose you want to use the dividend growth model to

value this firm's stock. You believe that dividends will keep growing at a 10%

per year indefinitely, and you think the market's requiredreturnon this stock is 11%. Let's assume that the firm pays dividends annually and that the next dividend is expected to be $.23 per share. The dividend will arrive in exactly one year. What would you pay for the stock right now? Suppose you buy the stock today, hold it just long enoughto receive the next dividend, and then sell it. What rate of return will you earn on that investment?

4-28 Suppose that today's date is March 30, 2010, and that the stock of E-Pay, Inc., pays a dividend every year on March 29. The most recent dividends was $1.50 per share. You expect the company's dividends to increase at a rate of 25% per year through March 29, 2013. After that, dividends will probably increase at 5% per year. Investors require a 14% return on E-Pay stock. Calculate the price of the stock on the following dates: March 30, 2010, September 30, 2011, and March 30, 2014.

4-30 Roban Corporation is considering going public but is unsure of a fair offering price for the company. Before hiring an investment banker to assist in making the public offering, mangers have decided to make their own estimate of the firm's common stock value. The firm's CFO has gathered data for performing the valuation using the free cash flow valuation model.

The firm's weighted average cost of capital is 12%, and it has $1,400,000 of debt at market value and $500,000 of preferred stock at its assumed market value. The estimated free cash flows over the next five years, 2011 through 2015, are given below. Beyond 2015, the firm expects its annual free cash flow to grow by 4% indefinitely.

Year (t) Free Cash Flow (FCF)

2011 250,000

2012 290,000

2013 320,000

2014 360,000

2015 400,000

a. Estimate the value of Roban Corps entire company by using the free cash flow approach.

b. Use your answer to part a, along with the previous data, to find Roban Corps common stock value.

c. If the firm plans to issue 220,000 shares of common stock, then what is its estimated value per share?