Textbook Questions- Week 6- Stock Valuation (Ch 7)

1) What’s the value of a stock that is expected to pay a dividend of $4 per share at
the end of every year forever? Assume an interest rate of 12%. Answer in dollars
with 2 decimals.

4
V 0= =33.33
0.12

2) You are thinking about buying a share of Apple today. You expect to receive a
dividend of $2 at the end of each of the next three years and to sell the share at
the end of the third year for a price of $210. What’s the value of the stock?
Assume a discount rate of 8% per year. Answer in dollars with 2 decimals.

 Want to find the PV of the annuity+ PV of 210

2 2 2+210
V 0= + +
(1+ 0.08) (1+0.08) (1+0.08)3
2

PV= 171.859= 171.86

3) What is the value of a share of IBM? You expect that the company will pay a
dividend of $ 5.5 at the end of the next year and that these dividends will grow at
a constant rate of 4% per year. Assume an interest rate of 9% per year. Answer
in dollars with 2 decimals.

¿0 5.5
V 0= = =110
r −g 0.09−0.04

4) What’s the value of a share of Pepsi Co? The stock paid a dividend of $6.2
yesterday. You expect future dividends to grow at a rate of 3% per year. Assume
an interest rate of 8% per year. Answer in dollars with 2 decimals.
¿1 ¿ 0∗(1+ g) 6.2(1+0.03)
V 0= = = =¿127.72
r −g r−g 0.08−0.03
Divided of yesterday = ¿0 ¿
5) You are valuing a comp any that specializes in AI. The company has reinvested
all its earnings into the business and thus has not paid a dividend yet. You
expect that it will not pay any dividends in the next four years. You expect the
first dividend of $2 to be paid out at the end of year 5 and that dividends will
continue to grow at a rate of 5% per year. What’s the value of one share?
Assume an interest rate of 10% per year. Answer in dollars with 2 decimals.

N= 5-1= 4 (it will not pay it in the next four years)

Value of 1 share in year 4:

D5 2
V 4= = = 40
(r −g) (0.1−0.05)
PV of stock dividends:
V4 40
PV= 4
= 4
=27.32
(1+r ) (1+ 0.1)

6) You expect a share of stock to pay dividends of $2.00 in the first year, $2.50 in
the second year, and $2.60 in the third year. You also expect to sell the stock for
$15.50 at the end of the third year. What is the price of one share? Assume a
discount rate of 6%? Answer in dollars with 2 decimals.

2 2.5 2.6 +15.5

V 3= + + =19.308=19.31
(1+ 0.06) (1+0.06) (1+0.06)3
2

7) HARD: You are thinking about buying a share of Robotics Inc. The firm just paid
a dividend of $1.75per share. You expect the dividend to grow at a rate of 6% in
the first five years. Then dividend growth will settle down at a rate of 2% per year.
For what price will you be able to sell your share in 5 years? Assume an interest
rate of 8% per year. Answer in dollars with 2 decimals.
¿6 ¿ 5 (1+ 0.02) ¿0 ( 1+0.06 )5 (1+ 0.02) 1.75 (1+ 0.06 )5 (1+0.02)
V 5= = = = =39.81
r −g 0.08−0.02 0.08−0.02 0.08−0.02

8) The Hershey Company stock is expected to earn $2.40 per share this year. Its
P/E ratio is 18. What is the stock price? Answer in dollars with 2 decimals.
 EPS∗P
V 0= =18∗2.4=43.2
E

9) Amazon has never paid a dividend. In August of 2022, the market value of its
stock was greater than $140 USD. Does this invalidate the dividend discount
model?

● This information has no correlation with the dividend discount model.

● Yes, it does invalidate the dividend discount model because Amazon has never
paid a dividend, therefore, the dividend discount model is an inaccurate way of
valuing Amazon's stock price.
● No, it does not invalidate the dividend discount model because this model allows
for the fact that firms may not currently pay dividends, but as the market matures
and Amazon grows, investors may justifiably believe that Amazon will achieve
high future earnings and then pay dividends, so the stock price today can still
reflect the present value of the expected stream of dividends.

10) Cape Cod potato chips just paid a $1 per share dividend. You expect the
dividend to grow steadily at a rate of 4.0 percent per year. What is the expected
dividend in year 3? Answer in dollars with 2 decimals.
1
¿3 = 3
=1.1248=1.12
(1+0.04)

11) Hershey Company just paid a dividend of $1. You expect the dividend to grow
steadily at a rate of 4.0 percent. Assume an interest rate of 12 percent. What is
the expected stock price 3 years from now? Answer in dollars with 2 decimals.
3
¿ ¿ (1+ 0.04) ¿0 (1+ 0.04 ) (1+0.04 )
V 3= 4 = 3 = =14.56
r −g 0.12−0.04 0.12−0.04

12) Preferred Products has issued preferred stock with an $8 annual dividend that
will be paid at the end of every year forever. If the interest rate is 12.0 percent, at
what price should the stock sell today? Answer in dollars with 2 decimals.
8
V 0= =66.67
0.12
13) Arts & Crafts Inc. will pay a dividend of $5 per share in 1 year. It currently sells at
$50 a share. The interest rate is 14.0 percent. Assuming that the company's
dividends are growing at a constant rate, what must be the expected growth rate
of the company's dividends? Provide an answer with 2 decimals.
¿1 5
V 0= 50=
r −g 0.14−g
7 – 50g = 5
50g = 2
g = 0.04 = 4.00%

14) **You believe that Coca-Cola will pay a dividend of $2 per share on its common
stock in one year. Thereafter, you expect dividends to grow at a rate of 6.0
percent in perpetuity. Assume that the interest rate is 12.0 percent. At what price
should the stock sell today? Answer in dollars with 2 decimals.

2 2
V 0= +
( 1+0.12 ) 0.12
 IF telling you growth rate, use the growth rate

15) Payphone Inc is in a declining industry. Sales, earnings and dividends are all
shrinking at a rate 10.0 percent. In one year, the company will pay a dividend of
$3 per share. Assume an interest rate of 15.0 percent. What price do you
forecast for the stock next year? Answer in dollars with 2 decimals.

¿ 2 ¿ 1(1−0 .1) 3(1−0.1)

V 1= = = =10.8
r−g r−g 0.15−(−0. 1)
- Minus because negative

16) You expect a share of stock to pay dividends of $1.00, $1.25, and $1.50 in each
of the next 3 years. You believe the stock will sell for $20 at the end of the third
year. Assume an interest rate of 10.0 percent. What is the stock price today?
Answer in dollars with 2 decimals.

1 1.25 1.5+ 20
V 3= + + =18.10
(1+ 0.1) (1+0.1) (1+0.1)3
2
17) Payphone Inc is in a declining industry. In 3 years it plans to close up shop and
liquidate its assets. As a result, the remaining forecasted dividends are DIV1 = 2 ,
DIV2 = 2.50 and DIV 3 = 18. Assume an interest rate of 12.0 percent. At what
price is the stock selling today? Answer in dollars with 2 decimals.

2 2.5 18+ 0
V 3= + + =16.59
(1+ 0.12) (1+0.12) (1+0.12)3
2

18) A company just announced a $1 per share dividend to be paid one year from
now. Analysts expect dividends to increase by $1.00 a year for another 2 years.
After the third year, dividend growth is expected to settle down to a more
moderate long-term growth rate of 6.0 percent. If the interest rate is 14.0 percent,
what must the stock price be today? Answer in dollars with 2 decimals.

1
∗¿ 4
1 2 3 ( 1+ 0.14 )3
V 0= + + +( )
( 1+0.14 ) ( 1+0.14 )2 ( 1+0.14 )3 r −g
1
∗¿ 3 ( 1+ 0.06 )
1 2 3 ( 1+0.14 )3
¿ + + +( )
( 1+ 0.14 ) (1+ 0.14 )2 ( 1+0.14 )3 0.14−0.06
1
∗3 ( 1+ 0.06 )
= 1 2 3 ( 1+0.14 )3
+ + +( )
( 1+ 0.14 ) (1+ 0.14 )2 ( 1+0.14 )3 0.14−0.06
= 31.27

19) **A candy company just came out with a newly invented flavor. As a result, the
company projects dividend growth of 20 percent per year for 4 years. By then,
other candy companies will have copycat flavors, competition will drive down
profits, and the sustainable growth rate of dividends will fall to 5 percent. The
most recent annual dividend was $1 per share. Assume an interest rate of 10.0
percent. What is the stock price today? Answer in dollars with 2 decimals.

3
¿ 5 ¿ 4 (1+0.2) = 34.7378
V 4= =
r−g 0.1−0.2
 NON-CONSTNAT BECAISE the GROWTH is bigger than the
intrest