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  3. 1. orwell building supplies' last dividend was $1.

1. Orwell building supplies' last dividend was $1.75. Its dividend growth rate is expected to be...

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Finance

1. Orwell building supplies' last dividend was $1.75. Itsdividend growth rate is expected to be constant at 31.00% for 2years, after which dividends are expected to grow at a rate of 6%forever. Its required return (rs) is 12%. What is thebest estimate of the current stock price?

2. Carby Hardware has an outstanding issue of perpetualpreferred stock with an annual dividend of $9.30 per share. If therequired return on this preferred stock is 6.5%, at what priceshould the preferred stock sell?

Answer & Explanation Solved by verified expert
4.0 Ratings (634 Votes)

1) Calculation of stock's current price:
Year Amount PVF @12% Present value
1                       2.29 0.893                       2.05
2                       3.00 0.797                       2.39
2                     53.00 0.797                     42.24
Total                     46.68
Value of share is $46.68
Working:
Calculation of dividend:
Year 1= dividend(1+ growth)= 1.75*(1+0.31)= 2.29
Year 2= Dividnd (1+growth)= 2.29*(1+0.31)= 3.00
Terminal value= Dividend(1+growth)/(return-growth)
                              =3.00*(1+0.06)/(0.12-0.06)
                              = 3.18/0.06= 53
2) Calculation of value of preferred stock:
Value of preferred stock= dividend/ required return
Value of preferred stock= 9.3/0.065= $143.08
Value of preferred stock is $143.08

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1. Orwell building supplies' last dividend was $1.75. Itsdividend growth rate is expected to be constant at 31.00% for 2years, after which dividends are expected to grow at a rate of 6%forever. Its required return (rs) is 12%. What is thebest estimate of the current stock price?2. Carby Hardware has an outstanding issue of perpetualpreferred stock with an annual dividend of $9.30 per share. If therequired return on this preferred stock is 6.5%, at what priceshould the preferred stock sell?

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