Q4) Macrosoft shares are currently selling at $41.98. Macrosofts current earnings per share are $3.99, and it has a policy of paying out 26.1% of its earnings each year in dividends. The rest is retained and invested in projects that earn a 10.22% rate of return per year. This situation is expected to continue indefinitely.

(a) Assuming the current market price of the stock reflects its intrinsic value as computed using the constant-growth DDM, what rate of return do Macrosofts investors require?

(b) By how much does its value exceed what it would be if all earnings were paid as dividends and nothing were reinvested?

(c) If Macrosoft were to cut its dividend payout ratio to 10%, what would happen to its stock price?

Q5) Alimama Group (MAMA) pays no cash dividends currently and is not expected to for the next 8 years. Its latest EPS was $1.50, all of which was reinvested in the company. The firms expected ROE for the next 8 years is 23% per year, and during this time, it is expected to continue to reinvest all of its earnings. Starting in year 9, the firms ROE on new investments is expected to fall to 15%, and the company is expected to start paying out 20% of its earnings in cash dividends, which it will continue to do forever after. MAMAs market capitalization rate is 13% per year.

(a) What is your estimate of MAMAs intrinsic value per share?

(b) Assuming its current market price is equal to its intrinsic value, what do you expect to happen to its price over the next year? The year after? (c) What effect would it have on your estimate of MAMAs intrinsic value if you expected MAMA to pay 30% of earnings starting in year 9?

Q6) The Big Green Bug just paid a dividend of $0.56 per share. The dividend is expected to grow at a rate of 23% a year for the next 2 years and then level off in year 3 to 7% per year forever. You think an appropriate market capitalization rate is 16% per year.

(a) What is your estimate of the intrinsic value of a share of the stock?

(b) If the market price of a share is equal to this intrinsic value, what is the expected dividend yield?

(c) What do you expect its price to be 1 year from now? Is the implied capital gain consistent with your estimate of the dividend yield and the market capitalization rate?