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FIN2014 Tutorial 3 v2023

This document contains 7 questions related to financial management and stock valuation. Question 1 asks to calculate stock price and returns for investors with 1- and 2-year horizons given expected dividend growth of 5% annually. Question 2 asks for a stock price given an expected annual dividend growth rate of 4.5% and cost of equity of 11%. Question 3 provides information to calculate a stock price given expected constant dividend and 0% growth rate and 8.5% required return. The remaining questions provide additional scenarios to calculate stock prices based on expected dividend payments, growth rates, and costs of equity or required returns.

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49 views

FIN2014 Tutorial 3 v2023

This document contains 7 questions related to financial management and stock valuation. Question 1 asks to calculate stock price and returns for investors with 1- and 2-year horizons given expected dividend growth of 5% annually. Question 2 asks for a stock price given an expected annual dividend growth rate of 4.5% and cost of equity of 11%. Question 3 provides information to calculate a stock price given expected constant dividend and 0% growth rate and 8.5% required return. The remaining questions provide additional scenarios to calculate stock prices based on expected dividend payments, growth rates, and costs of equity or required returns.

Uploaded by

felicia tan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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FIN2014 Financial Management 2023

Tutorial 3
Question 1
Starks Industries earnings and dividends per share are expected to grow by 5% per year,
forever. If next year’s dividend is $10 and equity cost of capital is 8%:
a) What is the current stock price?
b) Consider two investors:
i. Peter Parker invests for one year
ii. Venom invests for two years
Assume each invests in Starks industries – calculate the dividends, stock price and returns for
each investor.
FIN2014 Financial Management 2023

Question 2
Fabulous Fence Corp will pay $3.60 per share dividend next year. The company pledges to
increase its dividend by 4.50% per year, forever. If the cost of equity is 11%, how much is the
company’s stock price today.
FIN2014 Financial Management 2023

Question 3
An investment analyst provides the following information for Shazam’s stock:
Number of shares outstanding 500,000
Expected constant dividend $3.75 per share
Dividend growth rate (annual) 0%

If an investors’ required rate of return is 8.5%, Shazam stock’s current share price would be:
FIN2014 Financial Management 2023

Question 4
For the next three years, the annual dividends of Black Adam’s stock are expected to be $1.50,
$1.60 and $1.70. The stock price is expected to be $14.00 at the end of three years. If the
required rate of return is 8%, the estimate share price is:
FIN2014 Financial Management 2023

Question 5
1. Chunky McFunky Corporation pays annual dividends of $4.50 per share. The next
dividend will be paid in the following year. The dividends are expected to grow at the rate of
5.5% per year for the next four years. After that, the dividend will level off at 2% per year
forever. Find the value of the security if the firm’s cost of equity is 15%
FIN2014 Financial Management 2023

Question 6
Wanda Corp plans to pay a dividend of $4 next year. The company has an expected earnings
growth rate of 5% per year and has an equity cost of capital of 11%
a) Assuming Wanda’s dividend payout rate and expected growth remains constant, and
Wanda does not issue or repurchase shares, estimate Wanda’s share price
b) Suppose Wanda decides to pay a dividend of $2 next year and use the remaining $2 per
share to repurchase shares. If Wanda’s total payout remains constant, estimate Wanda’s
share price
FIN2014 Financial Management 2023

Question 7
Crane Sporting Goods expect to have earnings per share of $6 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 $60. Suppose Crane could cut its
dividend payout to 75% for the foreseeable future and use the retained earnings to open new
stores. The return on its investment in these stores is expected to be 12%. Assuming its equity
cost of capital is unchanged. What effect would this new policy have on Crane’s stock price?

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