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Hart Enterprises recently paid a dividend, D0, of $3.50. It expects to have nonconstant growth of 24% for 2 years followed by a constant rate of 5% thereafter. The firm’s required return is 8%.

  1. How far away is the horizon date? 
    1. The terminal, or horizon, date is the date when the growth rate becomes constant. This occurs at the beginning of Year 2.
    2. The terminal, or horizon, date is the date when the growth rate becomes constant. This occurs at the end of Year 2.
    3. The terminal, or horizon, date is infinity since common stocks do not have a maturity date.
    4. The terminal, or horizon, date is Year 0 since the value of a common stock is the present value of all future expected dividends at time zero.
    5. The terminal, or horizon, date is the date when the growth rate becomes nonconstant. This occurs at time zero.

     

  2. What is the firm’s horizon, or continuing, value? Round your answer to two decimal places.

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  3. What is the firm’s intrinsic value today, P0? Round your answer to two decimal places.

Javits & Sons’ common stock currently trades at $22.00 a share. It is expected to pay an annual dividend of $2.75 a share at the end of the year (D1 = $2.75), and the constant growth rate is 7% a year.

 

    1. What is the company’s cost of common equity if all of its equity comes from retained earnings? Round your answer to two decimal places.
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  1. If the company were to issue new stock, it would incur a 10% flotation cost. What would the cost of equity from new stock be? Round your answer to two decimal places.
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Microtech Corporation is expanding rapidly and currently needs to retain all of its earnings; hence, it does not pay dividends. However, investors expect Microtech to begin paying dividends, beginning with a dividend of $2.00 coming 3 years from today. The dividend should grow rapidly – at a rate of 28% per year – during Years 4 and 5; but after Year 5, growth should be a constant 9% per year. If the required return on Microtech is 18%, what is the value of the stock today? Round your answer to the nearest cent.

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Tunney Industries can issue perpetual preferred stock at a price of $53.50 a share. The stock would pay a constant annual dividend of $4.50 a share. What is the company’s cost of preferred stock, rp? Round your answer to two decimal places.

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Warr Corporation just paid a dividend of $1.75 a share (that is, D0 = $1.75). The dividend is expected to grow 7% a year for the next 3 years and then at 5% a year thereafter. What is the expected dividend per share for each of the next 5 years? Round your answers to two decimal places.

D1 = $  [removed] 
D2 = $  [removed] 
D3 = $  [removed] 
D4 = $  [removed] 
D5 = $  [removed] 

 

The Heuser Company’s currently outstanding bonds have a 10% coupon and a 12% yield to maturity. Heuser believes it could issue new bonds at par that would provide a similar yield to maturity. If its marginal tax rate is 40%, what is Heuser’s after-tax cost of debt? Round your answer to two decimal places.

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Thomas Brothers is expected to pay a $3.3 per share dividend at the end of the year (that is, D1 = $3.3). The dividend is expected to grow at a constant rate of 6% a year. The required rate of return on the stock, rs, is 15%. What is the stock’s current value per share? Round your answer to two decimal places.

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Trivoli Industries plans to issue perpetual preferred stock with an $11.00 dividend. The stock is currently selling for $92.00; but flotation costs will be 10% of the market price, so the net price will be $82.80 per share. What is the cost of the preferred stock, including flotation? Round your answer to two decimal places.

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