Bockarie 7-2 Constant Growth Valuation Boehm Incorporated is expected to pay a $1.

50 per share dividend at the end of t his year (i.e. D1=$1.50). The dividend is expected to grow at a constant rate of 7% a year. The required rate of return on the stock, rs, is 15%. What is the va lue per share of Boehms share? Answer Price = $1.50 / (0.15 - 0.07) = $18.75 7-4 Preferred Stock Valuation Nicks Enchiladas Incorporated has preferred stock outstanding that pays a divide nd of $5 at the end of each year. The preferred sells for $50 a share. What is t he stock required rate of returns? Answer $5/$50 = 10% 7-5 Non-constant Growth Valuation A company currently pays a dividend of $2 per share (D0=$2). It is estimated tha t the companys dividend will grow at a rate of 20% per year for the next 2 years, then at a constant rate of 7% thereafter. The companys stock has a beta of 1.2, the risk-free rate is 7.5%, and the market risk premium is 4%. What is your esti mate of the stocks current price? Solution: Step 1: Calculate the required rate of return on the stock: rs = rRF + (rM - rRF) = 7.5% + (4%)1.2 = 12.3%. Step 2: Calculate the expected dividends: D0 = $2.00 D1 = $2.00(1.20) = $2.4 D2 = $2.00(1.20)2 = $2.88 D3 = $2.88(1.07) = $3.08 Step 3: Calculate the PV of the expected dividends: PVDiv = $2.40/ (1.123) + $2.88/ (1.123)2 = $2.14 + $2.28 = $4.42. Step 4: Calculate P2: = D3/(rs g) = $3.08/(0.123 0.07) = $58.11. Step 5: Calculate the PV of: PV = $58.11/ (1.123)2 = $46.08 Step 6: Sum the PVs to obtain the stocks price: = $4.42 + $46.08 Answer= $50.50. Alternatively, using a financial calculator input the following: CF0 = 0, CF1 = 2.40, and CF2 = 60.99 (2.88 + 58.11) and then enter I/YR = 12.3 t o solve for NPV = $50.50. KINDLE ACCOUNT:- Order Number: 104-7335374-9312216