Reference no: EM132493547

Question 1. Suppose Maxwell Corporation will pay a dividend of $2.80 per share at the end of this year and a dividend of $3 per share next year. You expect Maxwell's share price to be $52 in two years. Assume that Maxwell's equity cost of capital is 10%.

a. What price would you be willing to pay for a Maxwell share today, if you planned to hold the share for two years?

b. Suppose instead you plan to hold the share for one year. For what price would you expect to be able to sell a Maxwell share in one year?

c. Given your answer to part (b), what price would you be willing to pay for a Maxwell share today, if you planned to hold the share for one year? How does this price compare to your answer in part (a)?

Question 2.

1. Hardy Enterprises expects earnings next year of $4 per share and has a 40% retention rate, which it plans to keep constant.
2. Its equity cost of capital is 10%, which is also its expected return on new investment.
3. Its earnings are expected to grow forever at a rate of 4% per year.
4. If its next dividend is due in one year, what do you estimate the firm's current share price to be?

Question 3.

1. Cooperaton Mining just announced it will cut its dividend from $4 to $2.50 per share and use the extra funds to expand.
2. Prior to the announcement, Cooperaton's dividends were expected to grow at a rate of 3% and its share price was $50.
3. With the planned expansion, Cooperaton's dividends are expected to grow at a rate of 5%.
4. What share price would you expect after announcement? (Assume that the new expansion does not change Cooperton's risk.)
5. Is the expansion a good investment?

Question 4. AFW Industries has 200 million shares outstanding and expects earnings at the end of this year of 700 million. AFW plans to pay out 60% of its earnings in total, paying 40% as a dividend and using 20% to repurchase shares. If AFW's earnings are expected to grow by 8% per year and these payout rates remain constant, determine AFW's share price assuming an equity cost of capital of 12%.