Illustration questions topic 3.

2: EQUITY VALUATION
Q1: Ted McKay has just bought the common stock of Ryland Corp. The company expects to grow at the
following rates for the next three years: 30 percent, 25 percent, and 15 percent. Last year the company
paid a dividend of $2.50. Assume a required rate of return of 10 percent. Compute the expected
dividends for the next three years and also the present value of these dividends.
Q2: Merriweather Manufacturing Company has been growing at a rate of 6 percent for the past two
years, and the CEO expects the company to continue to grow at this rate for the next several years. The
company paid a dividend of $1.20 last year. If your required rate of return is 14 percent, what is the
maximum price that you would be willing to pay for this companys stock?
Q3: Clarion Corp. has been selling electrical supplies for the past 20 years. The companys product line
has changed very little in the past five years, and the company does not expect to add any new items for
the foreseeable future. Last year, the company paid a dividend of $4.45 to its common stockholders. The
company is not expected to increase its dividends for the next several years. If your required rate of
return for such firms is 13 percent, what is the current value of this companys stock?
Q4: Barrymore Infotech is a fast -growing communications company. The company did not pay a dividend
last year and is not expected to do so for the next two years. Last year the companys growth
accelerated, and management expects to grow the business at a rate of 35 percent for the next five
years before growth slows to a more stable growth rate of 7 percent for the next several years. In the
third year, the company has forecasted a dividend payment of $1.10. Calculate the value of the
companys stock at the end of its rapid growth period (i.e., at the end of five years). The required rate of
return for such stocks is 17 percent. What is the current value of this stock?
Q5: You are interested in buying the preferred stock of a bank that pays a dividend of $1.80 every
quarter. If you discount such cash flows at 8 percent, what is the value of this stock?
Q6: Knight Supply Corp. has not grown for the past several years and management expects this lack of
growth to continue. The firm last paid a dividend of $3.56. If you require a rate of return of 13 percent,
what is the current stock price?
Q7: Moriband Corp. just paid a dividend of $2.15 yesterday. The company is expected to grow at a steady
rate of 5 percent for the foreseeable future. If investors in stocks of companies like Moriband require a
rate of return of 15 percent, what should be the market price of Moribands stock?
Q8: X-Centric Energy Company has issued perpetual preferred stock with a stated (par) value of $100
and a dividend of 4.5 percent. If the required rate of return is 8.25 percent, what is the stocks current
market price?
Q9: Kay Williams is interested in purchasing the common stock of Reckers, Inc., which is currently priced
at $37.45. The company is expected to pay a dividend of $2.58 next year and to grow at a constant rate
of 7 percent.
a. What should the market value of the stock be if the required rate of return is 14
percent?
b. Is this a good buy? Why or why not?
Q10: You own a company that competes with Old World DVD Company (in the previous problem). Instead
of selling DVDs, however, your company sells music downloads from a web site. Things are going well
now, but you know that it is only a matter of time before someone comes up with a better way to
distribute music. Your company just paid a $1.50 per share dividend and you expect to increase the
dividend 10 percent next year. However, you then expect your dividend growth rate to begin going down
to 5 percent the following year, 2 percent the next year, and to -3 percent per year thereafter. Based
upon these estimates, what is the value of a share of your companys stock? Assume that the required
rate of return is 12 percent.
Q11: Tre-Bien, Inc., is a fast growing technology company. Management projects rapid growth of 30
percent for the next two years, then a growth rate of 17 percent for the following two years. After that, a
constant growth rate of 8 percent is expected. The firm expects to pay its first dividend of $2.45 a year
from now. If dividends will grow at the same rate as the firm and the required rate of return on stocks
with similar risk is 22 percent, what is the current price of the stock?

Q12: Quansi, Inc., management expects to pay no dividends for the next six years. It has projected a
growth rate of 25 percent for the next seven years. After seven years, the firm will grow at a constant
rate of 5 percent. Its first dividend, to be paid in year 7, will be $3.25. If the required rate of return is 24
percent, what is the stock worth today?