Estimate the firm’s current stock price

1. Summit Systems just paid an annual dividend of $1.50. If you expect Summit’s dividend to grow by 6% per year, what is its price per share if the firm’s equity cost of capital is 11%?

2. Dorpac Corporation has a dividend yield of 1.5%. Its equity cost of capital is 8%, and its dividends are expected to grow at a constant rate.

a. What is the expected growth rate of Dorpac’s dividends?

b. What is the expected growth rate of Dorpac’s share price?

Laurel Enterprises pays annual dividends and the next dividend is expected to be in one year. Laurel expects earnings next year of $4 per share and has a 70% retention rate, which it plans to keep constant. Its equity cost of capital is 10%, which is also its expected return on new investment; this is expected to continue forever.

What do you estimate the firm’s current stock price to be?

Solution: