Reference no: EM133227596
CHAPTER 7 SHARE VALUATION
1. If you own 15 000 shares of BHP Billiton Ltd (BHP) and it pays a dividend of $0.27 per share, what is the total dividend you will receive?
2. Spectacular Furniture Ltd has issued two million 8% cumulative preference shares at a face value of $2 each and 10 million ordinary shares. In 2016, the company made a loss and did not pay any dividends. In 2017 the board of directors announced that the company will pay a cash dividend of $0.16 on each preference share and $0.12 on each ordinary share. Is this permitted?
3. Purchell Corporation has a preference share with an annual dividend of $3. If the required rate on Purcell's preference share is 8%, what is its price?
Jetson Industries has a share price of $22 today. If Jetson is expected to pay a dividend of $0.88 this year and its share price is expected to grow to $23.54 at the end of the year, what is Jetson's dividend yield and equity cost of capital?
4. Rampart Corporation has a dividend yield of 1.5%. Its equity cost of capital is 8%, and its dividends are expected to grow at a constant rate.
a. What is the expected growth rate of Rampart's dividends?
b. What is the expected growth rate of Rampart's share price?
5. RFK Limited expects earnings this year of $5 per share, and it plans to pay a $3 dividend to shareholders.
RFK will retain $2 per share of its earnings to reinvest in new projects that have an expected return of 15% per year.
Suppose RFK will maintain the same dividend payout rate, retention rate and return on new investments in the future and will not change its number of outstanding shares.
a. What growth rate of earnings would you forecast for RFK?
b. If RFK's equity cost of capital is 12%, what price would you estimate for DFB shares?
c. Suppose instead that RFK paid a dividend of $4 per share this year and retained only $1 per share in earnings.
That is, it chose to pay a higher dividend instead of reinvesting in as many new projects.
d. If RFK maintains this higher payout rate in the future, what share price would you estimate for the firm now?
Should RFK follow this new policy?
6. Cooperaton Mining just announced it will cut its dividend from $4 to $2.50 per share and use the extra funds to expand.
Prior to the announcement, Cooperaton's dividends were expected to grow at a rate of 3% and its share price was $50.
With the planned expansion, Cooperaton's dividends are expected to grow at a rate of 5%.
What share price would you expect after announcement? (Assume that the new expansion does not change Cooperton's risk.)
Is the expansion a good investment?
7. Gillette Corporation will pay an annual dividend of $0.65 one year from now.
Analysts expect this dividend to grow at 12% per year thereafter until the fifth year.
After that, growth will level off at 2% per year. According to the dividend-discount model, what is the value of a Gillette share if the firm's equity cost of capital is 8%?
8. Highline Corporation has just paid an annual dividend of $0.96.
Analysts are predicting an 11% per year growth rate in earnings over the next five years.
After that, Highline's earnings are expected to grow at the current industry average of 5.2% per year.
If Highline's equity cost of capital is 8.5% per year and its dividend payout ratio remains constant, for what price does the dividend- discount model predict Highline shares should sell?
9. AFW Industries has 200 million shares outstanding and expects earnings at the end of this year of 700 million. AFW plans to pay out 60% of its earnings in total, paying 40% as a dividend and using 20% to repurchase shares. If AFW's earnings are expected to grow by 8% per year and these payout rates remain constant, determine AFW's share price assuming an equity cost of capital of 12%.