You are charged with the valuation of Hurst Company’s stock.

Subject: Business    / Finance
Question

You are charged with the valuation of Hurst Company’s stock. You have access to the following information: Hurst dividends are expected to grow at a rate of 10% for the next three years, after which growth will taper to a constant rate of 5%. Hurst’s beta is 1.5, the current yield on Treasury bills is 3% and the return on the market is 7%. If Hurst Company is expected to pay a dividend of $2.25 at the end of the year, what is the stock’s current price?

Your financial advisor offers you some shares of Mirha Enterprises’ common stock which recently paid a dividend of $2.00. Mirha’s dividend is expected to grow at 5% per year for the next 3 years. If you buy the stock, you plan to hold it for 3 years and then sell it. The required return on the stock is 12%.

Find the expected dividend for each of the next 3 years.

Find the present value of the dividend stream in part (a).

You expect the price of the stock to be $34.73 when you sell it in 3 years. Discounted at a 12% rate, what is the present value of this expected future stock price?

If you plan to buy the stock, hold it for 3 years, and then sell it for $34.73, what is the most you should pay for the stock today?

Use the Gordon model to solve for the price of this stock. Assume g=5% (Started working on this one. Not sure if it is right)

P0 = (D0(1+g)) / (rs-g)

= (2(1-.05)) / (.12 – .05)

=30

Is the value of the stock dependent on how long you plan to hold it? If your holding period was 2 years instead of 3 years, or 4 years instead of 3 years, would this affect the value of the stock today? Explain.