Question
Problem 4 (Total 20 Points): a) Suppose you expect Nike to pay an annual dividend of $0.49 per share in the coming year and to
Problem 4 (Total 20 Points):
a) Suppose you expect Nike to pay an annual dividend of $0.49 per share in the coming year and
to trade $37.40 per share at the end of the year. If investments with equivalent risk to Nike'
stock have an expected return of 5.60%, what is the most you would pay today for Nike's stock?
What dividend yield and capital gain rate would you expect at this price? (5 Points)
b) Consolidated Adidas, Inc., is a regulated utility company that services the New York City area.
Suppose Adidas plans to pay $1.70 per share in dividends in the coming year. If its equity
cost of capital is 4% and dividends are expected to grow by 3% per year in the future,
estimate the value of Adidas's stock.(5 Points)
c) Crane Sporting Goods expects to have earnings per share of $8 in the coming year. Rather
than reinvest these earnings and grow, the firm plans to pay out all of its earnings as a dividend.
With these expectations of no growth, Crane's current share price is $55. Suppose Crane
could cut its dividend payout rate to 75% for the foreseeable future and use the retained
earnings to open new stores. The return on investment in these stores is expected to be
12%. If we assume that the risk of these new investments is the same as the risk of its
existing investments, then the firm's equity cost of capital is unchanged. What effect
would this new policy have on Crane's stock price? (5 Points)
d) Suppose The Walt Disney Company plans to pay $0.42 per share in dividends in the coming
year. If its equity cost of capital is 9.8% and dividends are expected to grow by 7.5% per
year in the future, estimate the value of Disney's stock. (5 Points)
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