# Woidtke Manufacturing’s stock currently sells - Expert Answers

Woidtke Manufacturing’s stock currently sells for \$22 a share. The stock just paid a dividend of \$1.20 a share (i.e., D0 = \$1.20), and the dividend is expected to grow forever at a constant rate of 10% a year. What stock price is expected 1 year from now? What is the estimated required rate of return on Woidtke’s stock (assume the market is in equilibrium with the required return equal to the expected return)?

Nick’s Enchiladas Incorporated has preferred stock outstanding that pays a dividend of \$5 at the end of each year. The preferred sells for \$50 a share. What is the stock’s required rate of return (assume the market is in equilibrium with the required return equal to the expected return)? A company currently pays a dividend of \$2 per share (D0 = \$2). It is estimated that the company’s dividend will grow at a rate of 20% per year for the next 2 years, and then at a constant rate of 7% thereafter. The company’s stock has a beta of 1.2, the risk-free rate is 7.5%, and the market risk premium is 4%. What is your estimate of the stock’s current price?

Crisp Cookware’s common stock is expected to pay a dividend of \$3 a share at the end of this year (D1 = \$3.00); its beta is 0.8; the risk-free rate is 5.2%; and the market risk premium is 6%. The dividend is expected to grow at some constant rate g, and the stock currently sells for \$40 a share. Assuming the market is in equilibrium, what does the market believe will be the stock’s price at the end of 3 years (i.e., what is P3 Assume that the average firm in your company’s industry is expected to grow at a constant rate of 6% and that its dividend yield is 7%. Your company is about as risky as the average firm in the industry, but it has just successfully completed some R&D work that leads you to expect that its earnings and dividends will grow at a rate of 50% [D1 = D0(1 + g) = D0(1.50)] this year and 25% the following year, after which growth should return to the 6% industry average. If the last dividend paid (D0) was \$1, what is the estimated value per share of your firm’s stock? Simpkins Corporation does not pay any dividends because it is expanding rapidly and needs to retain all of its earnings. However, investors expect Simpkins to begin paying dividends, with the first dividend of \$0.50 coming 3 years from today. The dividend should grow rapidly—at a rate of 80% per year—during Years 4 and 5. After Year 5, the company should grow at a constant rate of 7% per year. If the required return on the stock is 16%, what is the value of the stock today (assume the market is in equilibrium with the required return equal to the expected return)? Several years ago, Rolen Riders issued preferred stock with a stated annual dividend of

10% of its \$100 par value. Preferred stock of this type currently yields 8%. Assume dividends are paid annually.

a. What is the estimated value of Rolen’s preferred stock?

b. Suppose interest rate levels have risen to the point where the preferred stock now yields 12%. What would be the new estimated value of Rolen’s preferred stock?

a. Describe briefly the legal rights and privileges of common stockholders.

b. (1) Write out a formula that can be used to value any stock, regardless of its dividend pattern.

(2) What is a constant growth stock? How are constant growth stocks valued?

(3) What happens if a company has a constant g that exceeds its rs? Will many stocks

have expected g rs in the short run (i.e., for the next few years)? In the long run (i.e., forever)?

c. Assume that Temp Force has a beta coefficient of 1.2, that the risk-free rate (the yield on T bonds) is 7.0%, and that the market risk premium is 5%. What is the required rate of return on the firm’s stock?

d. Assume that Temp Force is a constant growth company whose last dividend (D0,

which was paid yesterday) was \$2.00 and whose dividend is expected to grow indefinitely at a 6% rate.

(1) What is the firm’s current estimated intrinsic stock price?

(2) What is the stock’s expected value 1 year from now?

(3) What are the expected dividend yield, the expected capital gains yield, and the expected total return during the first year?

e. Suppose Temp Force’s stock price is selling for \$30.29. Is the stock price based more on

long-term or short-term expectations? Answer this by finding the percentage of Temp

Force’s current stock price that is based on dividends expected during Years 1, 2, and 3.

f. Why are stock prices volatile? Using Temp Force as an example, what is the impact on the estimated stock price if g falls to 5% or rises to 7%? If rs changes to 12%% or to 14%?

g. Now assume that the stock is currently selling at \$30.29. What is its expected rate of return?