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SPREADSHEET PROBLEM - STOCK EVALUAT JATION The problem requires you to use File C07 on the computer problem spreadsheet. I a Microweb Company has never paid a dividend. But, this year the company expects to pay a dividend equal to $2.50 per share, and it plans to continue paying this same dividend for the following two years (a total of three years). After the $2,50 dividend is paid at the end of Year 3 (1.c., beginning in Year 4), the company expects the dividend to grow at a 3 percent rate, and this growth rate will continue indefinitely. If investors require a 14 percent rate of return to purchase the company's common stock, what should be the market value of Microwel's stock today? b. Ultimate Electric, Inc. has just developed a solar panel capable of generating 200 percent more electricity than any solar panel currently on the market. As a result, Ultimate is expected to cxperience a 15 percent annunl growth rate for the next five years. When the five-year period ends, other firms will have developed comparable technology, and Ultimate's growth rate will slow to 5 percent per year indefinitely. Stockholders require a return of 12 percent on Ultimate's stock. The firm's most recent annual dividend (DO), which was paid yesterday, was $1.75 per share i Calculate the value of the stock today. i. Calculate the dividend yield, Di/po, the expected capital gains yield, and the expected total return (dividend yield plus capital gains yield) for this year. Calculate these same three yields for Year 5. iii. Suppose your boss believes that Ultimate's annual growth rate will be only 12 percent during the next five years and that the firm's normal growth rate will be only 4 percent. Under these conditions, what is the price of Ultimate's stock? iv. Suppose your boss regards Ultimate as being quite risky and believes that the required rate of return should be higher than the 12 percent originally specified. Rework the problem under the conditions originally given, except change the required rate of return to (1) 13 percent, (2) 15 percent, and (3) 20 percent to determine the effects of the higher required rates of return on Ultimate's stock price. 1. The following model is set up to compete the value of a stock of a company that experiences supernormal growth for a maximum of five years. 2. There are a number of instructions with which you should be familiar to use these computerized models. These instructions appear in a separate worksheet labeled INSTRUCTIONS. If you have not already done so, you should read these instructions now. To read these instructions, click on the worksheet labeled INSTRUCTIONS INPUT DATA: KEY OUTPUTS: Nonconstant growth Normal (constant) growth Req. rate of return Last dividend (D.) Supernormal period 25.00% 2.00% 11.00% $1.25 Current price (Po) Price at the end of Year 4 Dividend yield in Year 1 Dividend yield in Year 4 Cap. gains yield in Year 1 Cap. gains yield in Year 4 Total return both yrs $29.57 $34.59 5.28% 9.00% 5.72% 2.00% 11.00% 4 years MODEL-GENERATED DATA: Expected dividends: PV of dividends: Year 1 2 1.41 1.59 Year 1 2 3 4 5 1.56 1.95 2.44 3.05 1.79 on WN 4 2.01 Stock price: End of Year 4 Stock price: Today, Po 34.59 29.57 Yields in Year 4 Yields in Year 1 Dividend Capital Gain Total 9.00% 2.00% 11.00% Dividend Capital Gain Total 5.28% 5.72% 11.00%

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