1. During the period 1960– 2007, earnings of the S& P 500 Index companies have increased at an average rate of 8.18 percent per year, and the dividends paid have increased at an average rate of 5.9 percent per year. Assume that: Dividends will continue to grow at the 1960– 2007 rate. The required return on the index is 8 percent. Companies in the S& P 500 Index collectively paid $ 246.6 billion in dividends in 2007. Estimate the aggregate value of the S& P 500 Index component companies at the beginning of 2008 using the Gordon growth model.
2. Great Plains Energy is a public utility holding company that listed its 4.5 percent cumulative perpetual preferred stock series E on the NYSE Euronext in March 1952 (Ticker: GXPPrE). The par value of the preferred stock is $ 100. If the required rate of return on this stock is 5.6 percent, estimate the value of the stock.
3. Maspeth Robotics shares are currently selling for € 24 and have paid a dividend of € 1 per share for the most recent year. The following additional information is given: The risk-free rate is 4 percent; The shares have an estimated beta of 1.2; and The equity risk premium is estimated at 5 percent. Based on the above information, determine the constant dividend growth rate that would be required to justify the market price of € 24.
4. You are analyzing the stock of Ansell Limited (Australian Stock Exchange: ANN), a healthcare company, as of late June 2008. The stock price is A $ 9.74. The company’s dividend per share for the fiscal year ending 30 June 2008 was A $ 0.27. You expect the dividend to increase by 10 percent for the next three years and then increase by 8 percent per year forever. You estimate the required return on equity of Ansell Limited to be 12 percent.
A. Estimate the value of ANN using a two-stage dividend discount model.
B. Judge whether ANN is undervalued, fairly valued, or overvalued.
5. Sime Natural Cosmetics Ltd. has a dividend yield of 2 percent based on the current dividend and a mature phase dividend growth rate of 5 percent a year. The current dividend growth rate is 10 percent a year, but the growth rate is expected to decline linearly to its mature phase value during the next six years.
A. If Sime Natural Cosmetics is fairly priced in the marketplace, what is the expected rate of return on its shares?
B. If Sime were in its mature growth phase right now, would its expected return be higher or lower, holding all other facts constant?