Practice Problems 6

 

 

Practice Problems #6 APEC 3501

1.

What w would ould you pay for a share of ABC Corporation Corpor ation stock today if it is going to pay a $2 dividend and be worth $110 in one year? You require a 12% return on your equity investments. investments. [$100]

2.

The dividend o on n Russian Mo Motors tors common stock will be $2 in 1 year, $3.50 in 2 years, and $5.00 in 3 years. A business associate has committed to buying the stock from from you for $75 in 3 y years. ears. If you require a 10% return on your investment, how much would you be willing to pay for a share of this stock? [$64.82]

3.

A stock that pays a constant dividend of $2.50 currently sells for $20.00. What is the required rate of return? [12.5%]

4.

What w would ould you pay for a stock that is expected to pay a $1.50 dividend in one year if the expected dividend growth rate is 3% and you require a 16% return on your investment? [$11.54]

5.

ABC Corporation’s common stock dividend yield is 2.1%, it just paid a dividend of $1 and is expected pay a dividend of is $1.07 one yearrate from and are expected same rateto indefinitely indefinitely. . What the required ofnow, return ondividends ABC ABC's 's stock? [9.1%] to grow at this

6.

If Russian Motors closed at $22 and the current quarterly dividen dividend d is $1.25, what % yield would be reported in the Wall Street Journal ? [22.7%]

7.

Suppose that you have just purchased a share of stock for $22.50. The most recent dividend was $1.50 and dividends are expected to grow at a rate of 5% indefinitely. What must your required return be on the stock? [12.00%]

8.

McIver's Meals, Inc. currently pays a $1.00 annual dividend. Investors believe that the firm (and dividends) will grow at 15% next year, 10% annually for the two years after that, and 5% annually thereafter. Assume the required return is 10%. What is the current market price of the stock? [$25.09]

9.

Energis Energistics, tics, Inc. plans to retain and reinvest all of their earning earningss for the next 3 years; at the end of year 3 the firm will pay a special dividend of $5.00 per share. Beginning in year 4, the firm will  begin to pay a dividend dividend of $1.00 per sshare, hare, which is expected expected to grow at a 3% rate annually forever. Given a required return of 12%, the stock should sell for _____ today. [$11.47]

10.

A firm’s stock has a required requir ed return of 10%. The stock’s dividen dividend d yield is 6%. What is the dividend the firm just paid if the current stock price is $40? [$2.31]

(over)

 

11.

Suppose the Pale Hose Corp. is expected to pay a dividend next y year ear of $1.75 per share. Both sales and profits for Pale Hose are expected to grow at a rate of 15% for the following 2 years and then at 2% per year indefinitely. indefinitely. Its divide dividend nd is expected to grow grow by the same amount. If the required return is 14%, what is the value of a share of Pale Hose? [$17.92]

12.

Etling Inc.’s dividend is expected expected to grow at 6% for the next 2 y years ears and then at 3 3% % fforever. orever. The current dividend is $3 and the required return is 16%, what is the price of the stock? [$25.09]

13.  Use the following stock quote to answer the next four questions. 52 Weeks Hi Lo 126.25 72.5 a.  b. c. d.

Stock Citicorp

Sym CCI

Div 1.30

Yld % 1.32

PE 16

Vol 100s 20925

Hi 98.375

Lo 97.875

Close 98.125

Chg. +0.125

Assume the expected growth rate in dividends is 7%. Then the constant growth model suggests that the required return on Citicorp stock is [8.4%] Based on the quote, quote, a good estim estimate ate of EPS o over ver the last four four quarters is [$6.15] [$6.15] Assume that Citicorp paid a $1.12 annual dividend in the previous period. What is the dividend growth rate based on this thi s quote? [16.07%] Assume that Citicorp is selling at its equilibrium price. Also assume that dividends are expected to grow at a constant rate of 25% for the foreseeable future. What is the required return on the stock? [26.6%]