finance

FIN 340

Ch. 6, 7 - Week 5

1. A stock currently pays a dividend of $2 for the year. Expected dividend growth is 20% for the next three years and then growth is expected to revert to 7% thereafter for an indefinite amount of time. The appropriate required rate of return is 15%. If the current stock price is $30, is the stock correctly valued?

1. A company is expected to have a return on equity of 20% for the next four years. Its current stock price is $20. The company paid $1 in dividends in the most recent year, and had earnings per share of $1.25. If the company maintains its payout ratio, how much will the firm pay out in dividends over the next four years? If the company grows at its sustainable growth rate for the next four years, and than at 3% into perpetuity, is the company correctly valued today? Assume a required rate of return of 10%.

1. Hewitt Packing Company has an issue of $1,000 par value bonds with a 14% annual coupon rate. The issue pays interest semi-annually and has 10 years remaining to its maturity date. Bonds of similar risk are currently selling at a yield to maturity of 12% percent. What is the value of these Hewitt Packing Company bonds? If the yield increases to 15 percent, what would the new bond price be?

1. Liddy Products, Inc. just issued 10-year, 8% coupon bonds at par. Outstanding bonds of Limbaugh Corp., Liddy's closest competitor, have a maturity of 10 years and are viewed by investors as being of about the same risk as the Liddy bonds, but carry a 5% coupon. What would Limbaugh’s bonds be selling for currently? What is the current yield of the Limbaugh bond issue? Assume semi-annual coupons. Without any calculations, if the yield to maturity for these bonds were to increase by 50 basis points, which of the two company’s bond prices would change more?