Corporate Finance: A Focused Approach (mindtap Course List)
7th Edition
ISBN: 9781337909747
Author: Michael C. Ehrhardt, Eugene F. Brigham
Publisher: South-Western College Pub
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Textbook Question
Chapter 4, Problem 4Q
If a firm’s earnings per share grew from $1 to $2 over a 10-year period, the total growth would be 100%, but the annual growth rate would be less than 10%. True or false? Explain.
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If a firm’s earnings per share grew from $1 to $2 over a 10-year period, the total growthwould be 100%, but the annual growth rate would be less than 10%. True or false? Explain.(Hint: If you aren’t sure, plug in some numbers and check it out.)
2.
If a firm’s earnings per share grew from $1 to $2 over a 10-year period, the total growthwould be 100%, but the annual growth rate would be less than 10%. True or false? Explain.
(Hint: Solve for the interest rate. Make sure you put the PV or FV as a negative number.)
Suppose a firm is expected to increase dividends by 20% in one year and decrease by 12% in two years and then increase by 15% in three years. After that dividends will increase at a rate of 5% per year indefinitely.
The last dividend was $1.55 and the required return is 13%.
a) Compute the dividends until growth levels off.
Ans:
D1 = ?
D2 = ?
D3 = ?
D4 = ?
b) Find the expected future price at the beginning of the constant growth period:
Ans: P3 = ?
c) Find the present value of the expected future cash flows
Ans: P0 = ?
Chapter 4 Solutions
Corporate Finance: A Focused Approach (mindtap Course List)
Ch. 4 - Prob. 1QCh. 4 - Prob. 2QCh. 4 - An annuity is defined as a series of payments of a...Ch. 4 - If a firms earnings per share grew from 1 to 2...Ch. 4 - Prob. 5QCh. 4 - Prob. 1PCh. 4 - Prob. 2PCh. 4 - Prob. 3PCh. 4 - Prob. 4PCh. 4 - Prob. 5P
Ch. 4 - Prob. 6PCh. 4 - An investment will pay 100 at the end of each of...Ch. 4 - You want to buy a car, and a local bank will lend...Ch. 4 - Find the following values, using the equations,...Ch. 4 - Prob. 10PCh. 4 - Prob. 11PCh. 4 - Find the future value of the following annuities....Ch. 4 - Prob. 13PCh. 4 - Prob. 14PCh. 4 - Prob. 15PCh. 4 - Prob. 16PCh. 4 - Prob. 17PCh. 4 - Prob. 18PCh. 4 - Universal Bank pays 7% interest, compounded...Ch. 4 - Prob. 20PCh. 4 - Prob. 21PCh. 4 - Prob. 22PCh. 4 - A mortgage company offers to lend you 85,000; the...Ch. 4 - Prob. 24PCh. 4 - Prob. 25PCh. 4 - Prob. 26PCh. 4 - Prob. 27PCh. 4 - Prob. 28PCh. 4 - Prob. 29PCh. 4 - Your company is planning to borrow 1 million on a...Ch. 4 - It is now January 1. You plan to make a total of 5...Ch. 4 - Prob. 32PCh. 4 - Prob. 33PCh. 4 - You want to accumulate 1 million by your...Ch. 4 - Prob. 1MCCh. 4 - Prob. 2MCCh. 4 - Prob. 3MCCh. 4 - Prob. 4MCCh. 4 - Prob. 5MCCh. 4 - Prob. 6MCCh. 4 - Prob. 7MCCh. 4 - Prob. 8MCCh. 4 - Prob. 9MCCh. 4 - Prob. 10MCCh. 4 - Prob. 11MCCh. 4 - Prob. 12MCCh. 4 - Prob. 13MC
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- Suppose that X company expected to pay$1.05 dividends for the coming year and currently the company paid a dividend of $1, What is the value of the stock? If the required return is 10%. And the growth rate is expected to continue.arrow_forwarda. Determine average annual dividend growth rate over the past 5 years. Using that growth rate, what dividend would you expect the company to pay next year? b. Determine the net proceeds, N, that the firm will actually receive. c. Using the constant-growth valuation model, determine the required return on the company's stock, rg, which should equal the cost of retained earnings, r,. d. Using the constant-growth valuation model, determine the cost of new common stock, r,.arrow_forwardSuppose that a dividend of $ 3.25 per year was paid in the past period (t-1) and that the company has a constant growth of 4.5%. Its required yield is 12%. What is the maximum price you would pay for the share of this company?arrow_forward
- The Stieben Company has determined that the following will be true next year: T(ratio of total assets of sales)=1 P(net profit of margin)=5% d(dividend pay out ratio)=50% L(debt equity ratio)=1 a) What is Stieben's sustainable growth rate in sales? b)Can Stieben's actual growth rate in sales be different from its sustainable growth rate? Why or why not? c) How can Stieben change its sustainable growth?arrow_forwardSuppose the firm has historically earned 15%on equity (ROE) and has paid out 62% of earnings, and suppose investors expect similarvalues to obtain in the future. How could youuse this information to estimate the futuredividend growth rate, and what growth ratewould you get? Is this consistent with the5.8% growth rate given earlier?arrow_forwardSuppose that a company's most recent dividends per share paid upon the last year's net income was $1.6 . The share price of the company is fairly valued in the market at $10 . The expected dividend growth rate is 2% in perpetuity. Given that the risk-free rate is 3% and market risk premium is 10%, what happens to the share prices when the whole market increases by 10%? a) increase by 15.32%b) increase by 15.00%c) increase by 11.79%d) increase by 21.89%e) otherarrow_forward
- If a company's current stock price is $65.40 and it is likely to pay a $2.25 dividend next year. Since analysts estimate the company will have a 11.25% growth rate, what is its expected return?arrow_forwardCompany P currently pays a dividend of £1 per year, and this is not expected to change. It is currently valued on the stock market at £12.50. Company Q currently pays a dividend of 50p a share and is also valued at £12.50. What is the value of the growth opportunities available to Company Q? If this is expressed in % terms as a growth factor per year, what is it?arrow_forwardCompany Z earnings and dividends per share will grow indefinitely by 4.1% a year if next year's dividend is $9.0. The market capitalization rate is 13.9%. If Company Z were to distribute all its earnings, it could maintain a level dividend stream of $11.3 a share. How much is the market actually paying per share for growth opportunities? A. -11.6 B. 33.8 C. 15.0 D. 10.5arrow_forward
- If a firm’s earnings increase from 3.00 per share to 4.02 over a 6- year period, what is the rate of growth?arrow_forwardSuppose firm Z paid a dividend of 1.00 in the year that just ended . Earnings and dividends have grown from several years . The required rate on the stock is 0.12 and the market price is 60 per share . Find the constant growth g?arrow_forwardACME Inc. has the following ratios: A0*/S0 = 1.3; LO*/S0 = 0.35; profit margin = 0.12; and the dividend payout ratio = 37, or 37%. Sales last year were $85 million. Assuming that these ratios will remain constant, use the AFN equation to determine the firm's self-supporting growth rate-in other words, the maximum growth rate ACME can achieve without having to employ non-spontaneous external funds. (Equation 9-1)arrow_forward
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Dividend disocunt model (DDM); Author: Edspira;https://www.youtube.com/watch?v=TlH3_iOHX3s;License: Standard YouTube License, CC-BY