Chapter 6 - Exercises

Concept Questions and Exercises CORPORATE FINANCE 11e by Ross, Westerfield, Jaffe
CHAPTER 6
STOCK VALUATION
1. Stock Values The next dividend payment by ECY, Inc., will be $2.90 per share. Thedividends are
anticipated to maintain a growth rate of 5.5 percent, forever. If the stock currently sells for $53.10 per
share, what is the required return?
2. Stock Values For the company in the previous problem, what is the dividend yield?What is the expected
capital gains yield?
3. Stock Values Shiller Corporation will pay a $2.75 per share dividend next year.The company pledges to
increase its dividend by 5 percent per year, indefinitely. Ifyou require a return of 11 percent on your
investment, how much will you pay for thecompany’s stock today?
4. Stock Valuation Suppose you know that a company’s stock currently sells for $67 per share and the
required return on the stock is 10.8 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?
5. Growth Rate The newspaper reported last week that Bennington Enterprises earned$29 million this
year. The report also stated that the firm’s return on equity is 17 percent.Bennington retains 80 percent of
its earnings. What is the firm’s earnings growth rate? What will next year’s earnings be?
6. Stock Valuation Universal Laser, Inc., just paid a dividend of $2.90 on its stock. The growth rate in
dividends is expected to be a constant 6 percent per year, indefinitely. Investors require a 15 percent
return on the stock for the first three years, a 13 percent return for the next three years, and then an 11
percent return thereafter. What is the current share price for the stock?
7. Nonconstant Growth Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on
the stock over the next nine years, because the firm needs top low back its earnings to fuel growth. The
company will pay a dividend of $17.50 per share in 10 years and will increase the dividend by 5.5 percent
per year thereafter. If the required return on this stock is 12 percent, what is the current share price?
8. Nonconstant Dividends Bucksnort, Inc., has an odd dividend policy. The company has just paid a
dividend of $9 per share and has announced that it will increase the dividend by $4 per share for each of
the next five years, and then never pay another dividend. If you require a return of 12 percent on the
company’s stock, how much will you pay for a share today?
9. Differential Growth Synovec Corp. is experiencing rapid growth. Dividends are expected to grow at 30
percent per year during the next three years, 18 percent over the following year, and then 8 percent per
year indefinitely. The required return on this stock is 11 percent, and the stock currently sells for $65 per
share. What is the projected dividend for the coming year?
Concept Questions and Exercises CORPORATE FINANCE 11e by Ross, Westerfield, Jaffe
10. Nonconstant Growth and Quarterly Dividends Pasqually Mineral Water, Inc.,will pay a quarterly
dividend per share of $.90 at the end of each of the next 12 quarters. Thereafter, the dividend will grow at
a quarterly rate of 1 percent, forever. The appropriate rate of return on the stock is 10 percent,
compounded quarterly. What is the current stock price?
11. Stock Valuation and Cash Flows Fincher Manufacturing has projected sales of $135 million next year.
Costs are expected to be $76 million and net investment is expected to be $15 million. Each of these values
is expected to grow at 14 percent the following year, with the growth rate declining by 2 percent per year
until the growth rate reaches 6 percent, where it is expected to remain indefinitely. There are 5.5 million
shares of stock outstanding and investors require a return of 13 percent return on the company’s stock.
The corporate tax rate is 40 percent.
a. What is your estimate of the current stock price?
b. Suppose instead that you estimate the terminal value of the company using a PE multiple. The
industry PE multiple is 11. What is your new estimate of the company’s stock price?
12. Nonconstant Growth Storico Co. just paid a dividend of $3.40 per share. The company will increase its
dividend by 20 percent next year and will then reduce its dividend growth rate by 5 percentage points per
year until it reaches the industry average of 5 percent dividend growth, after which the company will keep
a constant growth rate forever. If the required return on Storico stock is 13 percent, what will a share of
stock sell for today?

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Concept Questions and Exercises CORPORATE FINANCE 11e by Ross, Westerfield, Jaffe

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