Reference no: EM133067947

1. Suppose investors expect the yearly dividend paid by Fabian's Flowers Corp to be 5/share permanently (equal to its eps). Assume the interest rate used by investors to discount these cash flows is 3% and the risk premium investors assign is 8.5%. Applying the Dividend Discount Model, what is price-per-share.

2. If Fabian's Book Value-per-share is 33, what must be the ROE investors are predicting for Fabian's?

3. No Nonsense Peanut Butter maintains a payout ratio of 60%. Its upcoming eps is expected to equal 4. Investors expect 7.5% eps growth into the future. The interest rate component of the discount rate is the same as Fabian's but investors add another 2% to the risk premium. Using the Gordon Growth Model, what is No-Nonsense's price-per-share?

4. Suppose the market price-per-share of No-Nonsense is 50. What does that imply about the market's expectation for Non-Nonsense's growth rate? Extra: Given this result, should you buy No-Nonsense? Compare it to Fabian's.

5. Using the assumptions in #1 and #3, calculate the percentage changes in price of an increase of 1.5% in the interest rate on the stock prices of the two companies.

6. Question for thought: The interest rate component of the discount rate equals a "real" interest rate plus an inflation "premium." It would seem, therefore, that an increase of 1.5% in either of these would lead to the results in #5. Why is this an incorrect conclusion?