Suppose that Shopify Inc. (SHOP) is selling for $36.00. Analysts believe that the growth rate for SHOP will be 30% per year for the next four years, 15% per year for the following two years, and thereafter the growth rate will be 8% indefinitely. SHOP’s most recent cash dividend per share was $3.00. The dividend will grow by the same rate as the company. Stockholders require a return of 20 percent on SHOP’s common stock. Required: Based on the above assumptions, determine the price of SHOP’s common stock. Explain whether an investor should buy the stock.

Suppose that Shopify Inc. (SHOP) is selling for $36.00. Analysts believe that the growth rate for SHOP will be 30% per year for the next four years, 15% per year for the following two years, and thereafter the growth rate will be 8% indefinitely. SHOP’s most recent cash dividend per share was $3.00. The dividend will grow by the same rate as the company. Stockholders require a return of 20 percent on SHOP’s common stock. Required: Based on the above assumptions, determine the price of SHOP’s common stock. Explain whether an investor should buy the stock.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter7: Common Stock: Characteristics, Valuation, And Issuance

Section: Chapter Questions

Problem 4P

See similar textbooks

Similar questions

Harmony Corporation will pay a dividend of RM1.50 a share next year. After this, earnings and dividends are expected to grow at a 9% annual rate indefinitely. Investors currently require a rate of return of 13%. The company is considering the following two business strategies and wishes to determine the effect of these strategies on the market price per share of its stock. Strategy 1: Continuing the present strategy will result in the expected growth rate and required rate of return stated above. Strategy 2: Expanding Harmony Corporation sales will increase the expected dividend growth rate to 11% but will increase the risk of the company. As a result, the rate of return required by investors will increase to 16%. From the standpoint of market price per share, which strategy is better? Show relevant workings to support your answer.
Suppose that Taiwan Semiconductor Manufacturing Company Limited (TSM) is selling for $100.00. Analysts believe that the growth rate for TSM will be 50% per year for the next two years, 30% per year for the following three years, and thereafter the growth rate will be 12% indefinitely. TSM's most recent cash dividend per share was $5.00. The dividend will grow by the same rate as the company. Stockholders require a return of 20 percent on TSM's common stock. Required: a) Based on the above assumptions, determine the price of TSM's common stock. b) Explain whether an investor should buy the stock.
Suppose that Domino’s Pizza, Inc. (DPZ) is selling for $305.00. Analysts believe that the growth rate for DPZ will be 20% per year for the next three years, 15% per year for the following two years, and thereafter the growth rate will be 8% indefinitely. DPZ’s most recent cash dividend per share was $5.00. The dividend will grow by the same rate as the company. Stockholders require a return of 15 percent on DPZ’s common stock. Required: Based on the above assumptions, determine the price of DPZ’s common stock. Explain whether an investor should buy the stock.
Stability Corporation’s dividend is expected to be $1.60 next year. Its current stock price is $40 per share. The company is a constant growth firm. If investors require a return of 12 percent on this stock, what do they think Stability’s growth rate will be?
Simon Fixtures Corp. is expected to pay $2.00 per share in dividends at the end of the year. The growth rate in dividends is expected to be constant at 8% per year. If the stock is selling for $50 per share, what is the required rate of return?
Analysts project that dividends for Industrial Amalgamated will be $2.00 per share next year and are expected to grow at 2.1% per year indefinately. If investor's have a required return of 8.5%, how much should the stock sell for?
Colgate-Palmolive Company has just paid an annual dividend of $1.08. Analysts are predicting dividends to grow by $0.11 per year over the next five years. After then, Colgate's earnings are expected to grow 6.4% per year, and its dividend payout rate will remain constant. If Colgate's equity cost of capital is 7.2% per year, what price does the dividend-discount model predict Colgate stock should sell for today? Question content area bottom Part 1 The price per share is $enter your response here. (Round to two decimal places.)
Chelsea Fashions is expected to pay an annual dividend of $0.80 a share next year. Themarket price of the stock is $22.40 and the growth rate is 5 percent. What is the firm's cost of equity?
Spendex Corporation paid a dividend of $ 1.13 per share today. Dividends are expected to grow at 11.00% per year for the next 3 years, then at 8.00% per year in the following 2 years. After the 5th year, the growth in dividends is expected to remain constant at 6.00%. As an investor, you require a 10.00% rate of return on this equity investment. What is the maximum price you would be willing to pay for a share of Spendex?
The earnings, dividends, and stock price of Shelby Inc. are expected to grow at 8% per year in the future. Shelby's common stock sells for $30 per share, its last dividend was $1.50, and the company will pay a dividend of $1.62 at the end of the current year. Using the discounted cash flow approach, what is its cost of equity? Round your answer to two decimal places. % If the firm's beta is 1.8, the risk-free rate is 10%, and the expected return on the market is 12%, then what would be the firm's cost of equity based on the CAPM approach? Round your answer to two decimal places. % If the firm's bonds earn a return of 10%, then what would be your estimate of rs using the own-bond-yield-plus-judgmental-risk-premium approach? (Hint: Use the mid-point of the risk premium range.) Round your answer to two decimal places. % On the basis of the results of parts a–c, what would be your estimate of Shelby's cost of equity? Assume Shelby values each approach equally. Round your answer…