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4. Church Inc. is presently enjoying relatively high growth because of a
surge in the demand for its new product. Management expects earnings
and dividends to grow at a rate of 25% for the next 4 years, after which
competition will probably reduce the growth rate in earnings and
dividends to zero, i.e., g = 0. The company’s last dividend, D0, was
$1.25, its beta is 1.20, the market risk premium is 5.50%, and the risk-
free rate is 3.00%. What is the current price of the common stock?
a. $26.77
b. $27.89
c. $29.05
d. $30.21
e. $31.42
5. Your boss, Sally Maloney, treasurer of Fred Clark Enterprises (FCE),
asked you to help her estimate the intrinsic value of the company's stock.
FCE just paid a dividend of $1.00, and the stock now sells for $15.00 per
share. Sally asked a number of security analysts what they believe FCE's
future dividends will be, based on their analysis of the company. The
consensus is that the dividend will be increased by 10% during Years 1
to 3, and it will be increased at a rate of 5% per year in Year 4 and
thereafter. Sally asked you to use that information to estimate the
required rate of return on the stock, rs, and she provided you with the
following template for use in the analysis.
Sally told you that the growth rates in the template were just put in as a
trial, and that you must replace them with the analysts' forecasted rates