Problem Set 4

NAME:________________________

1) Zeniba Inc.s stock is currently selling for $23.56 per share. The company just paid a dividend = $2.00 per share (i.e., D₀ = $2.00), and investors expect the dividend to grow at a constant rate out into the future. Investors require a minimum annual return on their investments in Zeniba stock = 15%. What is the growth rate of dividends per share expected by investors?

2) The Yubaba Company has so far not paid a dividend on its stock. Investors believe that the Company wont pay a dividend next year, but that it will pay dividends starting two years from now. The dividend then is expected to be $0.20 per share. Three years from now the dividend is expected to be $0.50 per share, and four years from now its expected to be $0.75 per share. Thereafter the dividend is expected to grow at a constant rate = 4% per year. Investors require a minimum annual rate of return on Yubaba stock = 13%.

a) What is your estimate of Yubabas stock price four years from now?

b) What is your estimate of Yubabas stock price today?

3) Ironore Limited is an iron mining company whose mines are slowly being depleted (i.e., little by little, the amount of iron ore available in the mine is declining as the ore is extracted each year). Therefore, investors expect Ironores Net Income to decline each year by 2%. and, since Ironore is a shrinking company, it is expected to pay out all of its Net Income as dividends to its shareowners. What is your estimate of Ironores intrinsic value per share? Assume investors require a minimum rate of return = 10% on an investment in Ironore stock.