1-2) Common stock value Zero growth Kelsey Drums, Inc., is
a well- established supplier of fine percussion instruments to orchestras all
over the United States. The company’s class A common stock has paid a dividend
of $ 5.00 per share per year for the last 15 years. Management expects to
continue to pay at that amount for the foresee-able future. Sally Talbot
purchased 100 shares of Kelsey class A common 10 years ago at a time when the
required rate of return for the stock was 16%. She wants to sell her shares
today. The current required rate of return for the stock is 12%. How much
capital gain or loss will Sally have on her shares?
Newman Manufacturing is considering a cash purchase of
the stock of Grip Tool. During the year just completed, Grips earned $4.25 par
share and paid cash dividends of $2.55 per share (D0= 2.55$). Grips’ earnings
and dividends are expected to grow at 25% per year for the next 3 years, after
which they are expected to grow at 10% per year to infinity. What is the
maximum price per share that Newman should pay for Grip if it has a required
return of 15% on investment with risk characteristics similar to those of Grips?
