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Chapter 9. Valuing Stocks AC my merging way y blems All problems are available in MyLab Finance. The MyLab icon indicates Excel Projects problems available in MyLab Finance. The Dividend-Discount Model 1. Assume Evco, Inc., has a current price of $45 and will pay a $2.05 dividend in one year, and its equity cost of capital is 16%. What price must you expect it to sell for right after paying the dividend in one year in order to justify its current price? 2. Anle Corporation has a current price of $17, is expected to pay a dividend of $2 in one year, and its expected price right after paying that dividend is $18. a. What is Anle's expected dividend yield? b. What is Anle's expected capital gain rate? c. What is Anle's equity cost of capital? X MyLab 3. Suppose Acap Corporation will pay a dividend of $2.84 per share at the end of this year and $3.01 per share next year. You expect Acap's stock price to be $50.68 in two years. If Acap's equity cost of capital is 8.3%: a. What price would you be willing to pay for a share of Acap stock today, if you planned to hold the stock for two years? b. Suppose instead you plan to hold the stock for one year. What price would you expect to be able to sell a share of Acap stock for in one year? c. Given your answer in part (b), what price would you be willing to pay for a share of Acap stock today, if you planned to hold the stock for one year? How does this compare to your answer in part (a)? 4. Krell Industries has a share price of $21.44 today. If Krell is expected to pay a dividend of $0.78 this year, and its stock price is expected to grow to $24.63 at the end of the year, what is Krell's dividend yield and equity cost of capital? Applying the Dividend-Discount Model 5. NoGrowth Corporation currently pays a dividend of $1.36 per year, and it will continue to pay this dividend forever. What is the price per share if its equity cost of capital is 15% per year? > Chapter 9. Valuing Stocks AC 8. In mid-2018, some analysts recommended that General Electric (GE) suspend its dividend payments to preserve cash needed for investment. Suppose you expected GE to stop paying dividends for two years before resuming an annual dividend of $1 per share, paid 3 years from now, growing by 3% per year. If GE's equity cost of capital is 9%, estimate the value of GE's shares today. 9. In 2006 and 2007, Kenneth Cole Productions (KCP) paid annual dividends of $0.72. In 2008, KCP paid an annual dividend of $0.36, and then paid no further dividends through 2012. KCP was acquired at the end of 2012 for $15.25 per share. a. What would an investor with perfect foresight of the above been willing to pay for KCP at the start of 2006? (Note: Because an investor with perfect foresight bears no risk, use a risk- free equity cost of capital of 5%.) b. Does your answer to (a) imply that the market for KCP stock was inefficient in 2006? 10. DFB, Inc., expects earnings at the end of this year of $4.19 per share, and it plans to pay a $2.43 dividend at that time. DFB will retain $1.76 per share of its earnings to reinvest in new projects with an expected return of 15.1% per year. Suppose DFB will maintain the same dividend payout rate, retention rate, and return on new investments in the future and will not change its number of outstanding shares. a. What growth rate of earnings would you forecast for DFB? b. If DFB's equity cost of capital is 12.2%, what price would you estimate for DFB stock today? c. Suppose DFB instead paid a dividend of $3.43 per share at the end of this year and retained only $0.76 per share in earnings. If DFB maintains this higher payout rate in the future, what stock price would you estimate now? Should DFB raise its dividend? 11. Cooperton Mining just announced it will cut its dividend from $4.27 to $2.67 per share and use the extra funds to expand. Prior to the announcement, Cooperton's dividends were expected to grow at a 2.9% rate, and its share price was $49.06. With the new expansion, Cooperton's dividends are ex- pected to grow at a 4.8% rate. What share price would you expect after the announcement? (Assume Cooperton's risk is unchanged by the new expansion.) Is the expansion a positive NPV investment? X 12. Procter and Gamble (PG) paid an annual dividend of $2.87 in 2018. You expect PG to increase its dividends by 8% per year for the next five years (through 2023), and thereafter by 3% per year. If the appropriate equity cost of capital for Procter and Gamble is 8% per year, use the dividend-discount model to estimate its value per share at the end of 2018. MyLab > 13. Colgate-Palmolive Company has just paid an annual dividend of $1.35. Analysts are predicting Afshan Calarasi dividende .. en 12 the f Chapter 9. Valuing Stocks AC my merging way y blems All problems are available in MyLab Finance. The MyLab icon indicates Excel Projects problems available in MyLab Finance. The Dividend-Discount Model 1. Assume Evco, Inc., has a current price of $45 and will pay a $2.05 dividend in one year, and its equity cost of capital is 16%. What price must you expect it to sell for right after paying the dividend in one year in order to justify its current price? 2. Anle Corporation has a current price of $17, is expected to pay a dividend of $2 in one year, and its expected price right after paying that dividend is $18. a. What is Anle's expected dividend yield? b. What is Anle's expected capital gain rate? c. What is Anle's equity cost of capital? X MyLab 3. Suppose Acap Corporation will pay a dividend of $2.84 per share at the end of this year and $3.01 per share next year. You expect Acap's stock price to be $50.68 in two years. If Acap's equity cost of capital is 8.3%: a. What price would you be willing to pay for a share of Acap stock today, if you planned to hold the stock for two years? b. Suppose instead you plan to hold the stock for one year. What price would you expect to be able to sell a share of Acap stock for in one year? c. Given your answer in part (b), what price would you be willing to pay for a share of Acap stock today, if you planned to hold the stock for one year? How does this compare to your answer in part (a)? 4. Krell Industries has a share price of $21.44 today. If Krell is expected to pay a dividend of $0.78 this year, and its stock price is expected to grow to $24.63 at the end of the year, what is Krell's dividend yield and equity cost of capital? Applying the Dividend-Discount Model 5. NoGrowth Corporation currently pays a dividend of $1.36 per year, and it will continue to pay this dividend forever. What is the price per share if its equity cost of capital is 15% per year? > Chapter 9. Valuing Stocks AC 8. In mid-2018, some analysts recommended that General Electric (GE) suspend its dividend payments to preserve cash needed for investment. Suppose you expected GE to stop paying dividends for two years before resuming an annual dividend of $1 per share, paid 3 years from now, growing by 3% per year. If GE's equity cost of capital is 9%, estimate the value of GE's shares today. 9. In 2006 and 2007, Kenneth Cole Productions (KCP) paid annual dividends of $0.72. In 2008, KCP paid an annual dividend of $0.36, and then paid no further dividends through 2012. KCP was acquired at the end of 2012 for $15.25 per share. a. What would an investor with perfect foresight of the above been willing to pay for KCP at the start of 2006? (Note: Because an investor with perfect foresight bears no risk, use a risk- free equity cost of capital of 5%.) b. Does your answer to (a) imply that the market for KCP stock was inefficient in 2006? 10. DFB, Inc., expects earnings at the end of this year of $4.19 per share, and it plans to pay a $2.43 dividend at that time. DFB will retain $1.76 per share of its earnings to reinvest in new projects with an expected return of 15.1% per year. Suppose DFB will maintain the same dividend payout rate, retention rate, and return on new investments in the future and will not change its number of outstanding shares. a. What growth rate of earnings would you forecast for DFB? b. If DFB's equity cost of capital is 12.2%, what price would you estimate for DFB stock today? c. Suppose DFB instead paid a dividend of $3.43 per share at the end of this year and retained only $0.76 per share in earnings. If DFB maintains this higher payout rate in the future, what stock price would you estimate now? Should DFB raise its dividend? 11. Cooperton Mining just announced it will cut its dividend from $4.27 to $2.67 per share and use the extra funds to expand. Prior to the announcement, Cooperton's dividends were expected to grow at a 2.9% rate, and its share price was $49.06. With the new expansion, Cooperton's dividends are ex- pected to grow at a 4.8% rate. What share price would you expect after the announcement? (Assume Cooperton's risk is unchanged by the new expansion.) Is the expansion a positive NPV investment? X 12. Procter and Gamble (PG) paid an annual dividend of $2.87 in 2018. You expect PG to increase its dividends by 8% per year for the next five years (through 2023), and thereafter by 3% per year. If the appropriate equity cost of capital for Procter and Gamble is 8% per year, use the dividend-discount model to estimate its value per share at the end of 2018. MyLab > 13. Colgate-Palmolive Company has just paid an annual dividend of $1.35. Analysts are predicting Afshan Calarasi dividende .. en 12 the f