Stock valuation

The one period model:

D +P
P0 = 1 1
1+R
The two period model
D1 D2 +P2
P0 = +
1+R (1+R)2
Zero growth dividend model: / Preferred stock valuation
D
P0 = (9.2)
R
Constant growth model
D
P0 = 1 (9.4)
R-g
Non constant growth model
D1 D2 Dt Pt
P0 = + +...+ + (9.6)
1+R (1+R)2 (1+R)t (1+R)t

1. PV of dividends: Cortez, Inc., is expecting to pay out a dividend of $2.50 next

year. After that it expects its dividend to grow at 7 percent for the next four
years. What is the present value of dividends over the next five-year period if
the required rate of return is 10 percent?

2. Zero growth: Xinhua Manufacturing Company has been generating stable

revenues but sees no growth in it for the foreseeable future. The company’s
last dividend was $3.25, and it is unlikely to change the amount paid out. If
the required rate of return is 12 percent, what is the stock worth today?
3. Constant growth: You are interested in investing in a company that expects
to grow steadily at an annual rate of 6 percent for the foreseeable future. The
firm paid a dividend of $2.30 last year. If your required rate of return is 10
percent, what is the most you would be willing to pay for this stock? (Round
to the nearest dollar.)
4. Preferred stock valuation: Ajax Company has issued perpetual preferred
stock with a par of $100 and a dividend of 5.5 percent. If the required rate of
return is 7.75 percent, what is the stock’s current market price?
5. Preferred stock: Each quarter, Transam, Inc., pays a dividend on its
perpetual preferred stock. Today, the stock is selling at $83.45. If the
required rate of return for such stocks is 10.5 percent, what is the quarterly
dividend paid by this firm?

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Stock valuation

6. Nonconstant growth: Starskeep, Inc., is a fast growing technology company.

The firm projects a rapid growth of 40 percent for the next two years and
then a growth rate of 20 percent for the following two years. After that, the
firm expects a constant-growth rate of 8 percent. The firm expects to pay its
first dividend of $1.25 a year from now. If your required rate of return on
such stocks is 20 percent, what is the current price of the stock?
7. Nonconstant growth: Lincoln, Inc., expects to pay no dividends for the next
four years. It has projected a growth rate of 35 percent for the next four
years. After four years, the firm will grow at a constant rate of 6 percent. Its
first dividend to be paid in year 5 will be worth $4.25. If your required rate of
return is 20 percent, what is the stock worth today?
8. Nonconstant growth: Lincoln, Inc., expects to pay no dividends for the next
four years. It has projected a growth rate of 35 percent for the next four
years. After four years, the firm will grow at a constant rate of 6 percent. Its
first dividend to be paid in year 5 will be worth $4.25. If your required rate of
return is 20 percent, what is the stock worth today?