Question 9-1. Assume Evco, Inc., has a current price of $50 and will pa

9-1. Assume Evco, Inc., has a current price of $50 and will pay a $2 dividend in one year, and its

equity cost of capital is 15%. What price must you expect it to sell for right after paying the

dividend in one year in order to justify its current price?

.

9-2. 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?

9-3. Suppose Acap Corporation will pay a dividend of $2.80 per share at the end of this year and $3

per share next year. You expect Acap’s stock price to be $52 in two years. If Acap’s equity cost

of capital is 10%:

a. What price would you be willing to pay for a share of Acap stock today, if you planned to

hold the stock for two years?

b. Suppose instead you plan to hold the stock for one year. What price would you expect to be

able to sell a share of Acap stock for in one year?

c. Given your answer in part (b), what price would you be willing to pay for a share of Acap

stock today, if you planned to hold the stock for one year? How does this compare to you

answer in part (a)?

9-4. Krell Industries has a share price of $22 today. If Krell is expected to pay a dividend of $0.88 this

year, and its stock price is expected to grow to $23.54 at the end of the year, what is Krell’s

dividend yield and equity cost of capital?

9-5. 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?

9-6. 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%?

9-7. Dorpac Corporation has a dividend yield of 1.5%. Dorpac’s 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 Dorpac’s dividends?

b. What is the expected growth rate of Dorpac’s share price?

9-8. Kenneth Cole Productions (KCP), suspended its dividend at the start of 2009. Suppose you do

not expect KCP to resume paying dividends until 2011.You expect KCP’s dividend in 2011 to be

$0.40 per year (paid at the end of the year), and you expect it to grow by 5% per year thereafter.

If KCP’s equity cost of capital is 11%, what is the value of a share of KCP at the start of 2009?

9-9. DFB, Inc., expects earnings this year of $5 per share, and it plans to pay a $3 dividend to

shareholders. DFB will retain $2 per share of its earnings to reinvest in new projects with an

expected return of 15% per year. Suppose DFB 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.

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