MGT 326/526 HW 4
1.Summit Systems will pay a stock dividend of $1.50 at the end of this year. If you expect Summit’s dividend to grow by 6%
per year, what is the price per share of stock if the firm’s cost of stock is 11%? $30.00
2. Gillette Corporation will pay an annual dividend of $0.65 one year from now. Analyst expect this dividend to grow at 12%
per year for the next 5 years. After that, dividend growth will level off to 2% per year. What is the value of Gillette’s stock if
the firm’s cost of stock is 8%? $15.07
3. A firm’s stock is expected to pay a dividend of $1.50 per share at the end of the 2003. The firm's NI is expected to grow at
an annual rate of 2.85%. The stock price was $39.23 at the beginning of 2003. By the end of 2003 the price of the firm’s stock
is expected to rise to $40.35. What is this stock's expected total yield? 6.6790%
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MGT 326/526 HW 4
4. Assume that the average firm in your company’s industry is expected to grow at a constant rate of 6% per year and the
average dividend yield is7%. Your company is about as risky as the average firm in the industry. Your firm has just completed
some R & D work that leads you to expect that its earnings and dividends will grow at a rate of 50% for the upcoming year and
25% the following year. After these two years of rapid growth you expect your firm’s earnings and dividends to grow at a
sustained rate of 6%. The last dividend paid by your firm was $1.00. What is the expected value of your firm’s stock? (Draw a
cash flow diagram)
P0 = $25.03
(Hint: The total return of a stock is composed of two parts: Dividend Yield and Capital Gains Yield. We are given the dividend
yield for this firm’s industry (7%). We are told that the average growth rate of this firm’s industry will be 6%. It is reasonable
to conclude that stock prices for the firms in this industry will also grow at this rate and thus it is the minimum expected Capital
Gains Yield. Thus rs of the industry is 13% (6% + 7%). This is the opportunity cost from the perspective of any investor that
may want to buy the stock of any firm in this industry and thus it is the required ROR (r s) for this particular firm.
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