1. ACME Corporation’s last year dividend was $1.50 per share. Dividend growth has been high but is expected to decline over the next few years. Specifically dividends are expected to grow 25% this year, 20% next year and 12% the following year and a constant 8% thereafter. Given the risk characteristics of the firm, investors require a 14% rate of return. The fair value for the stock according to the multi-period dividend discount model is?
2. You are given the following data on Company A’s Balance Sheet
| Company A (£millions) | |
|---|---|
| Debt | 200 |
| Equity (£1 a share) | 400 |
| Earnings before interest | 50 |
3. A firm has a primary gearing (debt to equity ratio) of 1.5, its profit rate on combined debt and equity is 15% and the interest payable on its debt is 10%. What is the expected rate of return on equity ?
4. A firm has a primary gearing (debt to equity) ratio of 2, its profit rate on combined debt and equity is 10% and the interest payable on its debt is 10%. What is the expected return on equity?
5. A company has just paid a last period dividend (Do) of 50 pence, its dividend is expected to increase by a constant 5% per annum, the risk free rate of interest is 8%, the expected rate of return on the market is 12% and the company has a beta of 1.5. According to the Gordon growth model an appropriate share price is: