Bill and Warren are also looking at issuing preferred and common stock to further expand CompU's businesses. They also want to examine their existing stock value to get a picture of how much they can sell additional stock for. Help Bill and Warren by answering the following questions.
1. The last dividend CompU paid was $0.80. The historical growth rate in dividends has been 6%, and analysts expect it to remain constant for the foreseeable future. Investors require a 14 percent rate of return.
a. Explain what is the current value or price of CompU's stock?
b. Explain what is the expected dividend yield?
c. Explain what is the common stock price one year from now?
d. If the growth rate was 8 instead of 6 percent, what would be the value of CompU's stock?
e. If the growth rate was as originally stated (6 percent) but the required rate of return increased from 14 to 16 percent, what would be the value of CompU's stock?
f. Based on the answers for d. and e., what is the relationship between growth rates and stock price and required return and stock price?
2. Instead of the information in question 1, what if analysts expect CompU's dividend to grow by 25 percent for the next 3 years, but increased competition is expected to force their growth rate to a constant 6 percent thereafter. CompU just paid a dividend of $0.80, and investors' rate of return is 14%. What is the value of CompU's stock today?
3. CellU, the company CompU is looking at purchasing, expected their dividend to grow at a rate of 35 percent for the next four years, then to drop to a growth rate of 15 percent for 2 more years, and then settle down to a 10 percent growth rate thereafter. CellU just paid a dividend of $2.50. Investors' required rate of return is 12 percent. What would CompU be willing to pay for CellU's stock?
4. Instead of common stock, CompU is also looking at issuing preferred stock so Bill Jobs can retain close ownership in the company. The preferred stock has a par value of $50 and will pay a 5% dividend per year. If the required return for investors is 8%, what is the value of the preferred stock?