PLEASE SHOW WORK

Dividend and Capital Gain Yields

1 AAA has analyzed five stocks and estimated the dividends they will pay next year as well as their prices at the end of the year. His projections are shown below. Current Projected Projected Stock Price Dividend Stock Price A $37.50 $1.45 $43.00 B $24.50 $0.90 $26.50 C $57.80 $2.10 $63.50 D $74.35 None $81.00 E $64.80 $3.15 $63.00 Compute the dividend yield, capital gains yield, and total one-year return implied by Pauls estimates for each stock. SOLUTION:

A. Dividend Yield=Dividend/price, Capital Gains yield= (End Price-Beg Price)/Beg Price and One-year return = (Divided + (End Price-Beg Price))/Beg Price

2. The stock of BBB Inc. is expected to pay the following dividends: Year 1 2 3 4 Dividend $2.25 $3.50 $1.75 $2.00 At the end of the fourth year its value is expected to be $37.50. What should BBB sell for today if the return on stocks of similar risk is 12%?

SOLUTION: Use Uneven Cash Flow (NPV) functions on the calculator and solve for NPV when Cash flow 1 = 2.25, cash flow 2 = 3.5 etc...

3. CCC has made a detailed study of the denim clothing industry. He's particularly interested in a company called DDD Fashions that makes stylish denim apparel for children and teenagers. CCC has done a forecast of DDD's earnings and looked at its dividend payment record. He's come to the conclusion that the firm will pay a dividend of $5.00 for the next two years followed by a year at $6.50. Fred's investment plan is to buy DDD now, hold it for three years and then sell. He thinks the price will be about $75 when he sells. What is the most Fred should be willing to pay for a share of DDD if he can earn 10% on investments of similar risk?

SOLUTION: Use NPV Calculator

Growth Rates

4. EEE Corps stock has been growing at approximately 8% for several years and is now $30. Based on past growth rate performance, what would you expect the stocks price to be in five years?

SOLUTION:

The Constant Growth Model D(1+g)/(k-g)

5. The FFF Co. has paid an annual dividend of $2 per share for some time. Recently the board of directors voted to grow the dividend by 6% from now on. What is the most you would be willing to pay for a share of FFF if you expect a 10% return on your stock investments?

SOLUTION:

6. The GGG Corporation recently paid a $3 dividend, and is expected to grow at 5% forever. Investors generally require an expected return of at least 9% before they'll buy stocks similar to GGG. a. What is GGG's intrinsic value? b. Is it a bargain if it's selling at $76 a share?

SOLUTION:

7. HHH Inc.'s most recent annual dividend was $3.55 a share. The firm has been growing at a consistent 4% rate for several years, but analysts generally believe that better times are ahead, and that future growth will be in the neighborhood of 5%. The stock is currently selling for $75. Stocks similar to Tyler earn returns ranging from 8% to 10%. a. Calculate values for a share of HHH at interest rates of 8%, 9%, and 10%. b. Do you think Tyler is a good investment for the long run, that is, for someone planning to hold onto it for ten or more years? c. Do you think it's a good investment for the short term? That is, should you buy it with the expectation of selling in a relatively short period, say a year or less? d. Repeat the calculations of part a assuming that instead of rising, HHH's growth rate (1) remains at 4% or (2) declines to 3%. e. Comment on the range of prices that you've calculated.

SOLUTION:

8. The Anderson Pipe Co. just paid an annual dividend of $3.75 and is expected to grow at 8% for the foreseeable future. Harley Bevins generally demands a return of 9% when he invests in companies similar to Anderson. a. What is the most Harley should be willing to pay for a share of Anderson? b. Is your answer reasonable? Whats going here? What should Harley do with this result? SOLUTION: