The FI Corporation’s dividends per share are expected to grow indefinitely by 5% per year.

a. If this year’s year-end dividend is $8 and the market capitalization rate is 10% per year, what must the current stock price be according to the DDM?

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b. If the expected earnings per share are $12, what is the implied value of the ROE on future investment opportunities?

c. How much is the market paying per share for growth opportunities (that is, for an ROE on future investments that exceeds the market capitalization rate)?


The stock of Nogro Corporation is currently selling for $10 per share. Earnings per share in the coming year are expected to be $2. The company has a policy of paying out 50% of its earnings each year in dividends. The rest is retained and invested in projects that earn a 20% rate of return per year. This situation is expected to continue indefinitely.

a. Assuming the current market price of the stock refl ects its intrinsic value as computed using the constant-growth DDM, what rate of return do Nogro’s investors require?

b. By how much does its value exceed what it would be if all earnings were paid as dividends and nothing were reinvested?

c. If Nogro were to cut its dividend payout ratio to 25%, what would happen to its stock price? What if Nogro eliminated the dividend?


The risk-free rate of return is 8%, the expected rate of return on the market portfolio is 15%, and the stock of Xyrong Corporation has a beta coefficient of 1.2. Xyrong pays out 40% of its earnings in dividends, and the latest earnings announced were $10 per share. Dividends were just paid and are expected to be paid annually. You expect that Xyrong will earn an ROE of 20% per year on all reinvested earnings forever

a. What is the intrinsic value of a share of Xyrong stock?

b. If the market price of a share is currently $100, and you expect the market price to be equal to the intrinsic value one year from now, what is your expected one-year holdingperiod return on Xyrong stock?

 a. ROE in the constant-growth period will be 10%. b. Honda’s actual beta is 1.15. c. The market risk premium is 8.5%.


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