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Mr. Toriop owns 5,000 shares of stock in Yummy Corporation. Thecompany has announced that it will pay a dividend of $5 per sharein one year and a liquidating dividend of $50 per share in twoyears. The required return on Yummy stock is 12%.

a. What is the current share price of your stock?

b. What will be the company’s share price in one year’stime?

c. Mr. Toriop wishes to have equal amounts of dividend incomefor the next two years. How can he use homemade dividends toachieve this goal? Check that the present value of the cash flowswill be the same as it is before the homemade dividends. (Hint:Dividends will be in the form of an annuity.)

d. Suppose Mr. Toriop is thinking about buying a house for$220,000 in one year. How can he use homemade dividends to achievethis goal? Check that the present value of the cash flows will bethe same as it is before the homemade dividends.

e. Suppose Mr. Toriop is thinking about postponing the housepurchase for two years, by which time the price of the house willhave increased by $46,800. How can he use homemade dividends toachieve this goal? Check that the present value of the cash flowswill be the same as it is before the homemade dividends.

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Lelia Lubowitz
Lelia LubowitzLv2
28 Sep 2019

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The other members of management called a meeting to determine what they should do. Terry Jackson, the marketing manager, suggested that the company purchase a large number of shares of treasury stock. In that way, investors might notice that activity had picked up, and might decide to buy some more shares. This plan would use up most of the company’s available cash, so that there will be no money available for a cash dividend. Earth Systems has paid cash dividends every quarter for over ten years.

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Assume​ you've generated the following information about thestock of​ Bufford's Burger​ Barns: The​ company's latest dividendsof $3.96 a share are expected to grow to ​$4.20 next​ year, to$4.45 the year after​ that, and to $4.72 in year 3. After​ that,you think dividends will grow at a constant 5​% rate.

a. Use the variable growth version of thedividend valuation model and a required return of 15​% to find thevalue of the stock.

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