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1) LB Corp
1) LB Corp. has been growing at a rate of 14% per year in recent years. This same growth rate is expected to last indefinitely. The dividend just paid (D0) was $6.75 and the required rate of return is 14%. What is the value in year 2 of the dividend paid in that year? (what is D2, round to two decimals)
2) Shiny Industries producers of crab meat can issue perpetual preferred stock at a price of $30.99 per share. The stock would pay a constant annual dividend of $5.58 per share. What is the company's return on preferred stock
3) Enchancia Incorporated has common stock that is expected to grow at a rate of 25% over the next year. After this first year, it will stabilize to a 2% long-term growth rate. If the dividend just paid was $1.93 and the required rate of return on the stock is 8%, what is the value of the stock today (to 2 decimals)?
4) American Standard Corp. (AS) offers the following returns next year. What is the expected rate of return? (round to two decimals. Your answer should be in the form (##.## %) and should include a negative if appropriate
scenario probability AS returns
boom 30% 8%
normal economy 40% -11%
recession 30% 20%
Expert Solution
1) Computation of Value in Year 2 of the Dividend Paid in that year (D2):
D2 = D0*(1 + g)^2
= $6.75*(1 + 0.14)^2
D2 = $8.77
2) Computation of Company's Return on Preferred Stock:
Return on Preferred Stock = Dividend / Price* 100
= $5.58 / $30.99 * 100
Return on Preferred Stock = 18.01%
3) Computation of Value of the Stock Today:
Dividend for Year 1 = $1.93 * (1 + 25%) = $2.4125
Dividend for Year 2 = $2.4125 * (1 + 2%) = $2.4608
Value in Year 2 = Dividend for Year 2 / (Required Rate - Growth Rate)
= $2.4608 / 0.08 - 0.02
Value in year 2 = $41.01
Value of stock today = Present value of future cash flows
Present value = Future value / (1 + rate)^time
= $2.4125 / (1 + 0.08)^1 + $41.01 / (1 + 0.08)^1
= $2.23 + $37.97
Present Value = $40.21
4) Computation of Expected Return:
Expected Return = Respective Probability * Respective Return
= (30%*8%) + (40%*-11%) + (30%*20%)
= 2.40% + (-4.40%) + 6%
Expected Return = 4%
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