Score: 39.96/39.

96 Points 100 %

1. Award: 3.33 out of 3.33 points

The Jackson–Timberlake Wardrobe Co. just paid a dividend of $1.45 per share on its stock. The dividends
are expected to grow at a constant rate of 6 percent per year indefinitely. Investors require a return of 11
percent on the company's stock.

What is the current stock price? (Round your answer to 2 decimal places. (e.g., 32.16))

Current price $ 30.74

What will the stock price be in three years? (Round your answer to 2 decimal places. (e.g., 32.16))

Stock price $ 36.61

What will the stock price be in 15 years? (Round your answer to 2 decimal places. (e.g., 32.16))

Stock price $ 73.67

References

Worksheet Learning Objective:

08-01 How stock
prices depend on
future dividends and
dividend growth.

The Jackson–Timberlake Wardrobe Co. just paid a dividend of $1.45 per share on its stock. The dividends
are expected to grow at a constant rate of 6 percent per year indefinitely. Investors require a return of 11
percent on the company's stock.

What is the current stock price? (Round your answer to 2 decimal places. (e.g., 32.16))

Current price $ 30.74 ± 1%

What will the stock price be in three years? (Round your answer to 2 decimal places. (e.g., 32.16))
 Stock price $ 36.61 ± 1%

What will the stock price be in 15 years? (Round your answer to 2 decimal places. (e.g., 32.16))

Stock price $ 73.67 ± 1%

Explanation:

The constant dividend growth model is:

Pt = Dt × (1 + g) / (R − g)

So the price of the stock today is:

P0 = D0(1 + g) / (R − g) = $1.45(1.06) / (0.11 − 0.06) = $30.74

The dividend at Year 4 is the dividend today times the FVIF for the growth rate in dividends and four years,
so:

P3 = D3(1 + g) / (R − g) = D0(1 + g)4 / (R − g) = $1.45 (1.06)4 / (0.11 − 0.06) = $36.61

We can do the same thing to find the dividend in Year 16, which gives us the price in Year 15, so:

P15 = D15(1 + g) / (R − g) = D0(1 + g)16 / (R − g) = $1.45 (1.06)16 / (0.11 − 0.06) = $73.67

There is another feature of the constant dividend growth model: The stock price grows at the dividend
growth rate. So, if we know the stock price today, we can find the future value for any time in the future we
want to calculate the stock price. In this problem, we want to know the stock price in three years, and we
have already calculated the stock price today. The stock price in three years will be:

P3 = P0(1 + g)3 = $30.74(1 + 0.06)3 = $36.61

And the stock price in 15 years will be:

P15 = P0(1 + g)15 = $30.74(1 + 0.06)15 = $73.67

2. Award: 3.33 out of 3.33 points

The next dividend payment by Blue Cheese, Inc., will be $1.89 per share. The dividends are anticipated to
maintain a growth rate of 5 percent forever. If the stock currently sells for $38 per share, what is the
required return? (Round your answer to 2 decimal places. (e.g., 32.16))

Required return 9.97 %

References

Worksheet Learning Objective:

08-01 How stock
prices depend on
future dividends and
dividend growth.

The next dividend payment by Blue Cheese, Inc., will be $1.89 per share. The dividends are anticipated to
maintain a growth rate of 5 percent forever. If the stock currently sells for $38 per share, what is the
required return? (Round your answer to 2 decimal places. (e.g., 32.16))

Required return 9.97 ± 1% %

Explanation:

We need to find the required return of the stock. Using the constant growth model, we can solve the
equation for R. Doing so, we find:

R = (D1 / P0) + g = ($1.89 / $38.00) + 0.05 = 0.0997, or 9.97%

3. Award: 3.33 out of 3.33 points

Staal Corporation will pay a $3.40 per share dividend next year. The company pledges to increase its
dividend by 4.5 percent per year indefinitely. If you require a return of 11 percent on your investment, how
much will you pay for the company’s stock today? (Round your answer to 2 decimal places. (e.g., 32.16))

Stock price $ 52.31

References

Worksheet Learning Objective:

08-01 How stock
prices depend on
future dividends and
dividend growth.

Staal Corporation will pay a $3.40 per share dividend next year. The company pledges to increase its
dividend by 4.5 percent per year indefinitely. If you require a return of 11 percent on your investment, how
much will you pay for the company’s stock today? (Round your answer to 2 decimal places. (e.g., 32.16))

Stock price $ 52.31 ± 1%

Explanation:

Using the constant growth model, we find the price of the stock today is:

P0 = D1 / (R − g) = $3.40 / (0.11 − 0.045) = $52.31

4. Award: 3.33 out of 3.33 points

Suppose you know that a company’s stock currently sells for $59 per share and the required return on the
stock is 11 percent. You also know that the total return on the stock is evenly divided between a capital
gains yield and a dividend yield. If it’s the company’s policy to always maintain a constant growth rate in its
dividends, what is the current dividend per share? (Do not round intermediate calculations and round
your final answer to 2 decimal places. (e.g., 32.16))

Current dividend per share $ 3.08

 References

Worksheet Learning Objective:

08-01 How stock
prices depend on
future dividends and
dividend growth.

Suppose you know that a company’s stock currently sells for $59 per share and the required return on the
stock is 11 percent. You also know that the total return on the stock is evenly divided between a capital
gains yield and a dividend yield. If it’s the company’s policy to always maintain a constant growth rate in its
dividends, what is the current dividend per share? (Do not round intermediate calculations and round
your final answer to 2 decimal places. (e.g., 32.16))

Current dividend per share $ 3.08 ± 1%

Explanation:

We know the stock has a required return of 11 percent, and the dividend and capital gains yield are equal,
so:

Dividend yield = 1/2(0.11) = 0.055 = Capital gains yield

Now we know both the dividend yield and capital gains yield. The dividend is simply the stock price times
the dividend yield, so:

D1 = 0.055($59) = $3.25

This is the dividend next year. The question asks for the dividend this year. Using the relationship between
the dividend this year and the dividend next year:

D1 = D0(1 + g)

We can solve for the dividend that was just paid:

$3.25 = D0(1 + 0.055)

D0 = $3.25 / 1.055 = $3.08
5. Award: 3.33 out of 3.33 points

Lane, Inc., has an issue of preferred stock outstanding that pays a $4.75 dividend every year in perpetuity.
If this issue currently sells for $93 per share, what is the required return? (Round your answer to 2
decimal places. (e.g., 32.16))

Required return 5.11 %

References

Worksheet Learning Objective:

08-01 How stock
prices depend on
future dividends and
dividend growth.

Lane, Inc., has an issue of preferred stock outstanding that pays a $4.75 dividend every year in perpetuity.
If this issue currently sells for $93 per share, what is the required return? (Round your answer to 2
decimal places. (e.g., 32.16))

Required return 5.11 ± 1% %

Explanation:

The price of a share of preferred stock is the dividend divided by the required return. This is the same
equation as the constant growth model, with a dividend growth rate of zero percent. Remember, most
preferred stock pays a fixed dividend, so the growth rate is zero. Using this equation, we find the price per
share of the preferred stock is:

R = D/P0 = $4.75/$93 = 0.0511, or 5.11%

6. Award: 3.33 out of 3.33 points

Red, Inc., Yellow Corp., and Blue Company each will pay a dividend of $2.65 next year. The growth rate in
dividends for all three companies is 5 percent. The required return for each company’s stock is 8 percent,
11 percent, and 14 percent, respectively. What is the stock price for each company? (Round your answers
to 2 decimal places. (e.g., 32.16))
 Stock price
Red, Inc. $ 88.33
Yellow Corp. $ 44.17
Blue Company $ 29.44

References

Worksheet Learning Objective:

08-01 How stock
prices depend on
future dividends and
dividend growth.

Red, Inc., Yellow Corp., and Blue Company each will pay a dividend of $2.65 next year. The growth rate in
dividends for all three companies is 5 percent. The required return for each company’s stock is 8 percent,
11 percent, and 14 percent, respectively. What is the stock price for each company? (Round your answers
to 2 decimal places. (e.g., 32.16))

Stock price
Red, Inc. $ 88.33 ± 1%
Yellow Corp. $ 44.17 ± 1%
Blue Company $ 29.44 ± 1%

Explanation:

We can use the constant dividend growth model, which is:

Pt = Dt × (1 + g) / (R – g)

So the price of each company’s stock today is:

Red stock price = $2.65 / (0.08 − 0.05) = $88.33

Yellow stock price = $2.65 / (0.11 − 0.05) = $44.17
Blue stock price = $2.65 / (0.14 − 0.05) = $29.44

As the required return increases, the stock price decreases. This is a function of the time value of money: A
higher discount rate decreases the present value of cash flows. It is also important to note that relatively
small changes in the required return can have a dramatic impact on the stock price.

7. Award: 3.33 out of 3.33 points

TwitterMe, Inc., is a new company and currently has negative earnings. The company’s sales are $1.2
million and there are 130,000 shares outstanding.

If the benchmark price-sales ratio is 5.2, what is your estimate of an appropriate stock price? (Do not
round intermediate calculations.)

Stock price $ 48

What if the price-sales ratio were 4.6? (Do not round intermediate calculations and round your final
answer to 2 decimal places. (e.g., 32.16))

Stock price $ 42.46

References

Worksheet Learning Objective:

08-02 How to value
stocks using
multiples.

TwitterMe, Inc., is a new company and currently has negative earnings. The company’s sales are $1.2
million and there are 130,000 shares outstanding.

If the benchmark price-sales ratio is 5.2, what is your estimate of an appropriate stock price? (Do not
round intermediate calculations.)

Stock price $ 48 ± 1%

What if the price-sales ratio were 4.6? (Do not round intermediate calculations and round your final
answer to 2 decimal places. (e.g., 32.16))

Stock price $ 42.46 ± 1%

Explanation:

First, we need to find the sales per share, which is:

Sales per share = Sales / Shares outstanding

Sales per share = $1,200,000 / 130,000
Sales per share = $9.23

Using the equation to calculate the price of a share of stock with the PS ratio:

P = Benchmark PS ratio × Sales per share

So, with a PS ratio of 5.2, we find:

 P = 5.2($9.23)
P = $48.00

And with a PS ratio of 4.6, we find:

P = 4.6($9.23)
P = $42.46

8. Award: 3.33 out of 3.33 points

Antiques R Us is a mature manufacturing firm. The company just paid a dividend of $9.40, but management
expects to reduce the pay out by 4 percent per year indefinitely. If you require a return of 10 percent on this
stock, what will you pay for a share today? (Round your answer to 2 decimal places. (e.g., 32.16))

Current share price $ 64.46

References

Worksheet Learning Objective:

08-01 How stock
prices depend on
future dividends and
dividend growth.

Antiques R Us is a mature manufacturing firm. The company just paid a dividend of $9.40, but management
expects to reduce the pay out by 4 percent per year indefinitely. If you require a return of 10 percent on this
stock, what will you pay for a share today? (Round your answer to 2 decimal places. (e.g., 32.16))

Current share price $ 64.46 ± 1%

Explanation:

The constant growth model can be applied even if the dividends are declining by a constant percentage,
just make sure to recognize the negative growth. So, the price of the stock today will be:

P0 = D0(1 + g) / (R − g)
P0 = $9.40(1 − 0.04) / [(0.10 − (−0.04)]
P0 = $64.46
9. Award: 3.33 out of 3.33 points

Feeback Corporation stock currently sells for $64 per share. The market requires a return of 11 percent on
the firm’s stock. If the company maintains a constant 4.5 percent growth rate in dividends, what was the
most recent dividend per share paid on the stock? (Round your answer to 2 decimal places. (e.g.,
32.16))

Dividend paid per share $ 3.98

References

Worksheet Learning Objective:

08-01 How stock
prices depend on
future dividends and
dividend growth.

Feeback Corporation stock currently sells for $64 per share. The market requires a return of 11 percent on
the firm’s stock. If the company maintains a constant 4.5 percent growth rate in dividends, what was the
most recent dividend per share paid on the stock? (Round your answer to 2 decimal places. (e.g.,
32.16))

Dividend paid per share $ 3.98 ± 1%

Explanation:

We are given the stock price, the dividend growth rate, and the required return and are asked to find the
dividend. Using the constant dividend growth model, we get:

P0 = $64 = D0(1 + g) / (R − g)

Solving this equation for the dividend gives us:

D0 = $64(0.11 − 0.045) / (1.045)

D0 = $3.98
10. Award: 3.33 out of 3.33 points

E-Eyes.com Bank just issued some new preferred stock. The issue will pay an annual dividend of $20 in
perpetuity, beginning 20 years from now. If the market requires a return of 5.8 percent on this investment,
how much does a share of preferred stock cost today? (Do not round intermediate calculations and
round your final answer to 2 decimal places. (e.g., 32.16))

Stock price $ 118.13

References

Worksheet Learning Objective:

08-01 How stock
prices depend on
future dividends and
dividend growth.

E-Eyes.com Bank just issued some new preferred stock. The issue will pay an annual dividend of $20 in
perpetuity, beginning 20 years from now. If the market requires a return of 5.8 percent on this investment,
how much does a share of preferred stock cost today? (Do not round intermediate calculations and
round your final answer to 2 decimal places. (e.g., 32.16))

Stock price $ 118.13 ± 1%

Explanation:

The price of a share of preferred stock is the dividend payment divided by the required return. We know the
dividend payment in Year 20, so we can find the price of the stock in Year 19, one year before the first
dividend payment. Doing so, we get:

P19 = $20.00 / 0.058

P19 = $344.83

The price of the stock today is the PV of the stock price in the future, so the price today will be:

P0 = $344.83 / (1.058)19
P0 = $118.13
11. Award: 3.33 out of 3.33 points

Davis, Inc., currently has an EPS of $2 and an earnings growth rate of 8 percent. If the benchmark PE ratio
is 22, what is the target share price five years from now? (Do not round intermediate calculations and
round your final answer to 2 decimal places. (e.g., 32.16))

Target share price $ 64.65

References

Worksheet Learning Objective:

08-02 How to value
stocks using
multiples.

Davis, Inc., currently has an EPS of $2 and an earnings growth rate of 8 percent. If the benchmark PE ratio
is 22, what is the target share price five years from now? (Do not round intermediate calculations and
round your final answer to 2 decimal places. (e.g., 32.16))

Target share price $ 64.65 ± 1%

Explanation:

To find the target price in five years, we first need to find the EPS in five years, which will be:

EPS5 = EPS0(1 + g)5

EPS5 = $2(1 + 0.08)5
EPS5 = $2.94

So, the target stock price in five years is:

P5 = Benchmark PE ratio × EPS5

P5 = 22($2.94)
P5 = $64.65

12. Award: 3.33 out of 3.33 points

Consider four different stocks, all of which have a required return of 17 percent and a most recent dividend
of $4.50 per share. Stocks W, X, and Y are expected to maintain constant growth rates in dividends for the
foreseeable future of 10 percent, 0 percent, and –5 percent per year, respectively. Stock Z is a growth stock
that will increase its dividend by 20 percent for the next two years and then maintain a constant 12 percent
growth rate thereafter.

What is the dividend yield for each of these four stocks? (Do not round intermediate calculations and
round your final answers to 1 decimal places. (e.g., 32.1))

Dividend yield
Stock W 7.0 %
Stock X 17.0 %
Stock Y 22.0 %
Stock Z 4.7 %

What is the expected capital gains yield for each of these four stocks? (Leave no cells blank - be certain
to enter "0" wherever required. Negative amount should be indicated by a minus sign. Do not round
intermediate calculations and round your final answers to 1 decimal places. (e.g., 32.1))

Capital gains yield

Stock W 10.0 %
Stock X 0 %
Stock Y -5.0 %
Stock Z 12.3 %

References

Worksheet Learning Objective:

08-01 How stock
prices depend on
future dividends and
dividend growth.

Consider four different stocks, all of which have a required return of 17 percent and a most recent dividend
of $4.50 per share. Stocks W, X, and Y are expected to maintain constant growth rates in dividends for the
foreseeable future of 10 percent, 0 percent, and –5 percent per year, respectively. Stock Z is a growth stock
that will increase its dividend by 20 percent for the next two years and then maintain a constant 12 percent
growth rate thereafter.

What is the dividend yield for each of these four stocks? (Do not round intermediate calculations and
round your final answers to 1 decimal places. (e.g., 32.1))

Dividend yield
Stock W 7.0 ± 1% %
Stock X 17.0 ± 1% %
Stock Y 22.0 ± 1% %
Stock Z 4.7 ± 1% %
What is the expected capital gains yield for each of these four stocks? (Leave no cells blank - be certain
to enter "0" wherever required. Negative amount should be indicated by a minus sign. Do not round
intermediate calculations and round your final answers to 1 decimal places. (e.g., 32.1))

Capital gains yield

Stock W 10.0 ± 1% %
Stock X 0 ± 1% %
Stock Y -5.0 ± 1% %
Stock Z 12.3 ± 1% %

Explanation:

We are asked to find the dividend yield and capital gains yield for each of the stocks. All of the stocks have
a 17 percent required return, which is the sum of the dividend yield and the capital gains yield. To find the
components of the total return, we need to find the stock price for each stock. Using this stock price and the
dividend, we can calculate the dividend yield. The capital gains yield for the stock will be the total return
(required return) minus the dividend yield.

W: P0 = D0(1 + g) / (R − g) = $4.50(1.10) / (0.17 − 0.10) = $70.71

Dividend yield = D1 / P0 = $4.50(1.10) / $70.71 = 0.07, or 7%
Capital gains yield = 0.17 − 0.07 = 0.10, or 10%

X: P0 = D0(1 + g) / (R − g) = $4.50 / (0.17 − 0) = $26.47

Dividend yield = D1 / P0 = $4.50 / $26.47 = 0.17, or 17%
Capital gains yield = 0.17 − 0.17 = 0%

Y: P0 = D0(1 + g) / (R − g) = $4.50(1 − 0.05) / (0.17 + 0.05) = $19.43

Dividend yield = D1 / P0 = $4.50(0.95) / $19.43 = 0.22, or 22%
Capital gains yield = 0.17 − 0.22 = –0.05, or –5%

Z: P2 = D2(1 + g) / (R − g) = D0(1 + g1)2(1 + g2) / (R − g2) = $4.50(1.20)2(1.12)/(0.17 − 0.12) = $145.15

P0 = $4.50 (1.20) / (1.17) + $4.50(1.20)2 / (1.17)2 + $145.15 / (1.17)2 = $115.38
Dividend yield = D1 / P0 = $4.50(1.20) / $115.38 = 0.047, or 4.7%
Capital gains yield = 0.17 − 0.047 = 0.123, or 12.3%