QUESTION 5 The dividend for Weaver, Inc., is expected to grow at 22 percent for
ID: 2771276 • Letter: Q
Question
QUESTION 5
The dividend for Weaver, Inc., is expected to grow at 22 percent for the next 4 years before leveling off at a 5.1 percent rate indefinitely. If the firm just paid a dividend of $1.3 and you require a return of 14 percent on the stock, what is the most you should pay per share?
QUESTION 6
Bill’s Bakery expects earnings per share of 5 = $5 next year. Current book value is $4.5 per share. The appropriate discount rate for Bill's Bakery is 12.5 percent. Calculate the share price for Bill's Bakery if earnings grow at 4.9 percent forever.
Explanation / Answer
Q5 Statement showing calculation of Price of Stock Particulars Time PVF@14% Amount PV(Amount *PVF) Cash inflows Dividend (1.3*1.22) 1.000 0.8772 1.59 1.39 Cash inflows Dividend (1.3*1.22) 2.000 0.7695 1.93 1.49 Cash inflows Dividend (1.3*1.22) 3.000 0.6750 2.36 1.59 Cash inflows Dividend (1.3*1.22) 4.000 0.5921 2.88 1.71 Cash inflows Price = 2.88*1.051/(14%-5.1%) 4.000 0.5921 34.01 20.14 PV of Stock Price 26.32 Q6 EPS at end of year 5.00 Assuming all earnings are paid out therefore D1 = 5 ke 12.50% g 4.90% P = D1/(ke-g) P = 5/(12.50%-4.90%) P = 65.79