Problem1. Metallica Bearings, Inc. is a young start-up company. No dividends will be paid on the stock over the next 9 years, because the firm needs to plow back its earnings to fuel growth. The company will then pay the dividend of $15.75 per share ten years from today and will raise the dividend by 5.00 percent per year thereafter.
If the required return on this stock is 13.00 percent, what is current share price?
Problem2. Antiques ‘R’ us is mature manufacturing firm. The company just paid a dividend of $11.70, but management expects to diminish the payout by 4.5 percent per year, indefinitely.
If you require a return of 12 percent on this stock, what will you pay for share today?
Problem3. Yang Corp. is growing quickly. Dividends are anticipated to grow at a rate of 28 percent for the next 3 years, with the growth rate falling off to a stable 6.9 percent thereafter.
If the required return is 16 percent and the company just paid $3.20 dividend, what is current share price? (Hint: Compute the first four dividends.)