The Miller Milk Company has just come up with a new lactose - free dessert produ
ID: 2760881 • Letter: T
Question
The Miller Milk Company has just come up with a new lactose - free dessert product for people who can't eat or drink ordinary dairy products. Management expects the new product to fuel sales growth at 31% for about two years. After that competitors will copy the idea and produce similar products, and growth will return to about 2%, which is normal for the dairy industry in the area. Miller recently paid an annual dividend of $2.50, which will grow with the company. The return on stocks similar to Miller's is typically around 10%. What is the most you would pay for a share of Miller Round PVF values in intermediate calculations to four decimal places. Round the answer to two decimal places. $ Fox Woodworking Inc. issued preferred shares at a face value of $52 to yield 9% 10 years ago. The shares are currently selling at $62. What return are they earning for investors who buy them today Round the answer to two decimal places. %Explanation / Answer
12.
Value of stock = D1/(1+r) + D2(1+r)^2 + D3/(r-g)
r = rate of return
g= growth rate
Value of stock = = {2.50(1+.31)/ (1+.10)} + {2.50(1+.31)^2 / (1+.10)^2} + {[2.50(1+.31)^2*(1+.02)] / (1+.10)^3 / (.10-.02)}
These values have been calculated and shown in the above table
Value of stock = 2.98 + 3.55 + 3.29/(.10-.02) = $47.66
13. Preferred stock value = D/r
D = Dividend = $52 * 9%
r = rate of return (to be calculated)
62 = 52*9% / r
r = 4.68/62 *100 = 7.55%
Dividend PVF @10% Present value Year 1 3.28 0.9091 2.98 Year 2 4.29 0.8264 3.55 Year 3 4.38 0.7513 3.29