I Need Help with 5 & 6 Please!
1. Suppose investors expect the yearly dividend paid by Fabian's Flowers Corp to be 5/share permanently (equal to its eps). Assume the interest rate used by investors to discount these cash flows is 3% and the risk premium investors assign is 8.5%. Applying the Dividend Discount Model, what is price-per- share. 2. If Fabian's Book Value-per-share is 33, what must be the ROE investors are predicting for Fabian's? E.C. What if investor investors Fabian's not to be able to pay dividends for the next two years, but after that the yearly dividend will be 5/share permanently? All else the same as in #1. 3. No Nonsense Peanut Butter maintains a payout ratio of 60%. Its upcoming eps is expected to equal 4. Investors expect 7.5% eps growth into the future. The interest rate component of the discount rate is the same as Fabian's but investors add another 2% to the risk premium. Using the Gordon Growth Model, what is No-Nonsense's price- per-share? 4. Suppose the market price-per-share of No-Nonsense is 50. What does that imply about the market's expectation for Non-Nonsense's growth rate? Extra: Given this result, should you buy No-Nonsense? Compare it to Fabian's. 5. Using the assumptions in #1 and #3, calculate the percentage changes in price of an increase of 1.5% in the interest rate on the stock prices of the two companies. 6. Question for thought: The interest rate component of the discount rate equals a "real" interest rate plus an inflation premium. It would seem, therefore, that an increase of 1.5% in either of these would lead to the results in #5. Why is this an incorrect conclusion? 1. Suppose investors expect the yearly dividend paid by Fabian's Flowers Corp to be 5/share permanently (equal to its eps). Assume the interest rate used by investors to discount these cash flows is 3% and the risk premium investors assign is 8.5%. Applying the Dividend Discount Model, what is price-per- share. 2. If Fabian's Book Value-per-share is 33, what must be the ROE investors are predicting for Fabian's? E.C. What if investor investors Fabian's not to be able to pay dividends for the next two years, but after that the yearly dividend will be 5/share permanently? All else the same as in #1. 3. No Nonsense Peanut Butter maintains a payout ratio of 60%. Its upcoming eps is expected to equal 4. Investors expect 7.5% eps growth into the future. The interest rate component of the discount rate is the same as Fabian's but investors add another 2% to the risk premium. Using the Gordon Growth Model, what is No-Nonsense's price- per-share? 4. Suppose the market price-per-share of No-Nonsense is 50. What does that imply about the market's expectation for Non-Nonsense's growth rate? Extra: Given this result, should you buy No-Nonsense? Compare it to Fabian's. 5. Using the assumptions in #1 and #3, calculate the percentage changes in price of an increase of 1.5% in the interest rate on the stock prices of the two companies. 6. Question for thought: The interest rate component of the discount rate equals a "real" interest rate plus an inflation premium. It would seem, therefore, that an increase of 1.5% in either of these would lead to the results in #5. Why is this an incorrect conclusion
