Principle of Finance

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Assignment 5: Stock Valuation (classes 7 and 9)

Please answer all questions.

1. Anle Corporation has a current price of $20, is expected to pay a dividend of $1 in one year, and its expected price right after paying that dividend is $22.

a. What is Anle’s expected dividend yield?

b. What is Anle’s expected capital gain rate?

c. What is Anle’s equity cost of capital?

2. NoGrowth Corporation currently pays a dividend of $2 per year, and it will continue to pay this dividend forever. What is the price per share if its equity cost of capital is 15% per year?

3. In mid-2015, Coca-Cola Company
(KO) had a share price of $39. Its dividend was $1.00 per year, and you expect
Coca-Cola to raise this dividend by approximately 7% per year in perpetuity.

a. If Coca-Cola’s equity cost of capital is 8%, what share price would you expect based on your estimate of the dividend growth rate?

b. Given Coca-Cola’s share price, what would you conclude about your assessment of Coca-Cola’s future dividend growth?

4. Summit Systems will pay a dividend of $1.50 this year. If you expect Summit’s dividend to grow by 6% per year, what is its price per share if its equity cost of capital is 11%?

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