Loose Leaf for Foundations of Financial Management Format: Loose-leaf
17th Edition
ISBN: 9781260464924
Author: BLOCK
Publisher: Mcgraw Hill Publishers
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Chapter 18, Problem 9P
In doing a five-year analysis of future dividends, the Dawson Corporation is considering the following two plans. The values represent dividends per share.
a. How much in total dividends per share will be paid under each plan over the five years?
b. Mr. Bright, the vice president of finance, suggests that stockholders often prefer a stable dividend policy to a highly variable one. He will assume that stockholders apply a lower discount rate to dividends that are stable. The discount rate to be used for Plan A is 11 percent; the discount rate for Plan B is 14 percent. Compute the present value of future dividends. Which plan will provide the higher present value for the future dividends? (Round to two places to the right of the decimal point.)
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You want to check if GRBH stock is fairly priced in the markets by using the fundamental analysis. For this purpose, you have gathered the following information:
GRBH pays dividends once a year and the next dividend payment is expected to be made in one year. You project the EPS of the first and second year to be $5 and $7 respectively. The company dividend payout ratio is stable at 0.2. At the end of the second year, you assume that the company would become the average company in the industry. The industry average PE ratio is 8. You believe that the appropriate required rate of return on GRBH stock is 10% (CCR per annum).
And the current market price of GRBH stock is $45.
Find the present value of GRBH stock based on the information above. Is the stock over- or under-priced?
Find the alpha ( Expected abnormal rate of return, c ) assuming the mispriced figure would be corrected in a year.
A company is considering the following two dividend policies for the next five years.
Year
Policy #1
Policy #2
4.00
6.90
2
4.00
2.40
4.00
5.00
4
4.00
1.70
4.00
4.00
Required:
A. What is the total of the dividends per share that the stockholders will receive over the
full five year period?
B. If investors see no difference in the risk between the two policies, and therefore apply a
9.4% discount rate to both policies, what is the present value of each dividend stream?
C. Suppose investors see Policy #2 as the riskier of the two, and they therefore apply a
9.4% discount rate to Policy #1 and a 12% discount rate to Policy #2. Under this scenario,
what is the present value of each dividend stream?
D. What conclusions can be drawn from this exercise?
A
Policy #1
Policy #2
Year
1.
2
3
4
Total over five years
B
Policy #1
9.40%
Year
Cash Flow
PV Factor
Present value
Present value
Policy #2
9.40%
Cash Flow
PV Factor
Present value
Year
1.
3
4
5
Present value
Policy #1
9.40%
Year
Cash Flow
PV…
You want to check if GRBH stock is fairly priced in the markets by using the fundamental analysis. For this purpose, you have gathered the following information:
GRBH pays dividends once a year and the next dividend payment is expected to be made in one year. You project the EPS of the first and second year to be $5 and $7 respectively. The company dividend payout ratio is stable at 0.2. At the end of the second year, you assume that the company would become the average company in the industry. The industry average PE ratio is 8. You believe that the appropriate required rate of return on GRBH stock is 10% (CCR per annum).
And the current market price of GRBH stock is $45
Find the alpha ( Expected abnormal rate of return, c ) assuming the mispriced figure would be corrected in a year.
Chapter 18 Solutions
Loose Leaf for Foundations of Financial Management Format: Loose-leaf
Ch. 18 - Prob. 1DQCh. 18 - Prob. 2DQCh. 18 - Prob. 3DQCh. 18 - Prob. 4DQCh. 18 - Prob. 5DQCh. 18 - Prob. 6DQCh. 18 - Prob. 7DQCh. 18 - Prob. 8DQCh. 18 - Prob. 9DQCh. 18 - Prob. 10DQ
Ch. 18 - Prob. 11DQCh. 18 - Prob. 1PCh. 18 - Prob. 2PCh. 18 - Prob. 3PCh. 18 - Prob. 4PCh. 18 - Prob. 5PCh. 18 - Planetary Travel Co. has $240,000,000 in...Ch. 18 - Prob. 7PCh. 18 - Prob. 8PCh. 18 - In doing a five-year analysis of future dividends,...Ch. 18 - Prob. 10PCh. 18 - The shares of the Dyer Drilling Co. sell for $60 ....Ch. 18 - Prob. 12PCh. 18 - Prob. 13PCh. 18 - Phillips Rock and Mud is trying to determine the...Ch. 18 - Prob. 15PCh. 18 - Prob. 16PCh. 18 - Prob. 17PCh. 18 - Prob. 18PCh. 18 - Prob. 19PCh. 18 - Prob. 20PCh. 18 - Prob. 21PCh. 18 - Prob. 22PCh. 18 - Prob. 3WE
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