Question 1 a. Simpkins Corporation does not pay any dividends because it is expanding rapidly and needs...

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Question 1
a. Simpkins Corporation does not pay any dividends because it isexpanding rapidly and needs to retain all of its earnings. However,investors expect Simpkins to begin paying dividends, with the firstdividend of $1.50 coming 3 years from today. The dividend shouldgrow rapidly - at a rate of 70% per year - during Years 4 and 5.After Year 5, the company should grow at a constant rate of 4% peryear. If the required return on the stock is 12%, what is the valueof the stock today (assume the market is in equilibrium with therequired return equal to the expected return)? Round your answer tothe nearest cent. Do not round your intermediate computations.
b. A company currently pays a dividend of $1.75 per share(D₀ = $1.75). It is estimated that the company'sdividend will grow at a rate of 16% per year for the next 2 years,and then at a constant rate of 7% thereafter. The company's stockhas a beta of 1.95, the risk-free rate is 6.5%, and the market riskpremium is 4%. What is your estimate of the stock's current price?Do not round intermediate calculations. Round your answer to thenearest cent.
c. Crisp Cookware's common stock is expected to pay a dividendof $1.5 a share at the end of this year (D₁ = $1.50);its beta is 1.05. The risk-free rate is 4.9% and the market riskpremium is 6%. The dividend is expected to grow at some constantrate g_L, and the stock currently sells for $47 a share.Assuming the market is in equilibrium, what does the market believewill be the stock's price at the end of 3 years (i.e., what is P3)? Do not round intermediate steps. Round your answer to thenearest cent.

Answer & Explanation Solved by verified expert

3.7 Ratings (686 Votes)

	Required rate=	12.00%
Year	Previous year dividend	Dividend growth rate	Dividend current year	Horizon value	Total Value	Discount factor	Discounted value
1	0	0.00%	0		0	1.12	0
2	0	0.00%	0		0	1.2544	0
3	0	0.00%	1.5		1.5	1.404928	1.06767
4	1.5	70.00%	2.55		2.55	1.57351936	1.62057
5	2.55	70.00%	4.335	56.355	60.69	1.762341683	34.43714
	Long term growth rate (given)=	4.00%			*Value of Stock =*	*Sum of discounted value =*	37.13

Where
Current dividend =Previous year dividend*(1+growth rate)^corresponding year
Unless dividend for the year provided
Total value = Dividend + horizon value (only for last year)
Horizon value = Dividend Current year 5 *(1+long term growth rate)/( Required rate-long term growth rate)
Discount factor=(1+ Required rate)^corresponding period
Discounted value=total value/discount factor

Please ask remaining parts seperately

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Question 1a. Simpkins Corporation does not pay any dividends because it isexpanding rapidly and needs to retain all of its earnings. However,investors expect Simpkins to begin paying dividends, with the firstdividend of $1.50 coming 3 years from today. The dividend shouldgrow rapidly - at a rate of 70% per year - during Years 4 and 5.After Year 5, the company should grow at a constant rate of 4% peryear. If the required return on the stock is 12%, what is the valueof the stock today (assume the market is in equilibrium with therequired return equal to the expected return)? Round your answer tothe nearest cent. Do not round your intermediate computations.b. A company currently pays a dividend of $1.75 per share(D0 = $1.75). It is estimated that the company'sdividend will grow at a rate of 16% per year for the next 2 years,and then at a constant rate of 7% thereafter. The company's stockhas a beta of 1.95, the risk-free rate is 6.5%, and the market riskpremium is 4%. What is your estimate of the stock's current price?Do not round intermediate calculations. Round your answer to thenearest cent.c. Crisp Cookware's common stock is expected to pay a dividendof $1.5 a share at the end of this year (D1 = $1.50);its beta is 1.05. The risk-free rate is 4.9% and the market riskpremium is 6%. The dividend is expected to grow at some constantrate gL, and the stock currently sells for $47 a share.Assuming the market is in equilibrium, what does the market believewill be the stock's price at the end of 3 years (i.e., what is P3)? Do not round intermediate steps. Round your answer to thenearest cent.