Description: SwenConstruction has seen its business slowly wind down. It recentl
ID: 2684780 • Letter: D
Question
Description:
SwenConstruction has seen its business slowly wind down. It recently paid a dividend of $1.80 per share, but analysts expect the dividend to decrease by 6% per year. The risk-free is 6.0% and the market risk premium is 5.0%. Swen's beta is 0.6 and the value of its stock is $11.28 (market is in equilibrium).
QUESTIONS:
1) What is Swen's current expected dividend yield? (As a percent)
2) You would expect Swen's dividend yield to (choose one: stay the same, increase or decrease) over time.
3) What is Swen's expected stock price in one year?
4) Swen is a negative-growth stock -- its dividend is declining each year, and so is its stock price. Would a rational investor ever consider investing in Swen? Yes or No
Explanation / Answer
1) Swen's current expected dividend yield = 1.8*(1-.06)/Po = 1.692/11.28 = 0.15*100% = 15%
2) expected Swen's dividend yield would decrease overtime
3) Po = (D1+P1)/(1+r)
re=rf+(rm- rf)*
= 6+5*0.6 = 9%
Po = (1.692+P1)/(1.09)
P1 = 11.28*1.09 - 1.692 = $10.60
4) No a rational investor would not invest in Swen.