Please answer the following questions:
1. Suppose Big D, Inc., just paid a dividend of $2 per share today. It is expected to increase its dividend by 3% per year. The market requires a return of 10% on assets of this risk. how much should the stock be selling today? How much should the stock be selling in year 7?
(30 points)
Show your calculation to get full points.
Check your answer: Price today: $29.43; Price in year 7: $36.19
Answer:
Price today:
Price in year 7:
2. Burkhardt Corp. pays dividend every year and the company promised to increase its dividend by 1 percent per year indefinitely. Yesterday, the company paid a dividend of $1.5 ( is $1.5). Today morning, the company made a news announcement that the dividend growth rate will decline to 0 percent per year indefinitely from now on. If the discount rate is 6 percent per year compounded annually, how much will the price of the company’s stock drop today immediately after the news announcement?
(30 points)
Show your calculation to get full points.
Check your answer: Price drop is $5.30
Answer:
3. Suppose the expected net income of Camong Inc. is $2,000,000, and there is 500,000 shares outstanding. The company’s PE ratio in last year is 10, what is the expected stock price today?
(15 points)
Show your calculation to get full points.
Answer:
4. Wesen Corp. plan to launch NASDAQ through initial public offerings (IPO). After IPO, there will be 5 million shares of common stock outstanding. In this year, the company has net income of -$15 million and sales of $60 million. If the average PE ratio for the companies in the same industry is 20 and the average price-sales ratio is 6. What is the reasonable offering price?
(25 points)
Show your calculation to get full points.
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