Homework Help: Finance

Posted by Linda Chapman on Monday, November 1, 2010 at 7:52pm.

Cascade Mining Company expects its earnings and dividends to increase by 7 percent per
year over the next six years and then to remain relatively constant thereaft er. Th e fi rm
currently (that is, as of year 0) pays a dividend of $5 per share. Determine the value of a
share of Cascade stock to an investor with a 12 percent required rate of return.

Finance - Teresa, Saturday, February 12, 2011 at 6:28pm
Present Value of First 6-Years' Dividends:

6 兠[Do(1 + g1)t/(1 + ke)t]; Do = $5.00; g1 = .07; ke = .12
t=1
Present Value

Year Dividend Interest Factor Present Value
t Dt = 5.00(1 + .07)t PVIF.12,t Dt x PVIF.12,t

1 5.00(1 + .07)1 = .893 $ 4.778
$5.35

2 5.00(1 + .07)2 = .797 4.563
5.725

3 5.00(1 + .07)3 = .712 4.361
6.125

4 5.00(1 + .07)4 = .636 4.168
6.554

5 5.00(1 + .07)5 = .567 3.976
7.013

6 5.00(1 + .07)6 = .507 3.805
7.504

PV (First 6-Years' Dividends) $25.651

Value of Stock at End of Year 6:

P6 = D7/(ke - g2) g2 = .00

D7 = D6(1 + g2) = 7.504(1 + .00) = $7.504

P6 = 7.504/(.12 - .00) = $62.533
Present Value of P6:

PV(P6) = P6/(1 + ke)6 = 62.533/(1 + .12)6 = 62.533 x PVIF.12,6

= 62.533 X .507 = $31.704

Value of Common Stock (Po):

Po = PV (First 6-Years' Dividends) + PV(P6)

= 25.651 + 31.704 = $57.36 (tables)

Answer this Question

Related Questions

Finance - Cascade Mining Company expects its earnings and dividends to increase ...
Finance - Arena Distributors is a new company and currently pays no dividends. ...
Finance - Metallica Bearings, Inc., is a young start-up company. No dividends ...
finance - The Blinkelman Corporation has just announced that it plans to ...
Finance - Martell Mining Company's ore reserves are being depleted, so its ...
finance - The Cookie Shoppe expects sales of $500,000 next year at a 5% pretax ...
accounting - Baldwin Products Company anticipates reaching a sales level of $6 ...
Finance - Simtek currently pays a $2.50 dividend (D0) per share. Next year’...
investing - new millenium company's stock sells at a P/E ratio of 21 times ...
Finance - Ag Silver Mining, Inc. has $500,000 of earnings before interest and ...

For Further Reading

First Name:
School Subject:
Answer: