Practice Problems #6

APEC 3501

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What would you pay for a share of ABC Corporation 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. [$100] The dividend on Russian Motors 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 you for $75 in 3 years. 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] A stock that pays a constant dividend of $2.50 currently sells for $20.00. What is the required rate of return? [12.5%] What would 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] ABC Corporations common stock dividend yield is 2.1%, it just paid a dividend of $1 and is expected to pay a dividend of $1.07 one year from now, and dividends are expected to grow at this same rate indefinitely. What is the required rate of return on ABC's stock? [9.1%] If Russian Motors closed at $22 and the current quarterly dividend is $1.25, what % yield would be reported in the Wall Street Journal? [22.7%] 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%] 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] Energistics, Inc. plans to retain and reinvest all of their earnings 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 of $1.00 per share, which is expected to grow at a 3% rate annually forever. Given a required return of 12%, the stock should sell for _____ today. [$11.47] A firms stock has a required return of 10%. The stocks dividend yield is 6%. What is the dividend the firm just paid if the current stock price is $40? [$2.31]

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Suppose the Pale Hose Corp. is expected to pay a dividend next year 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. Its dividend is expected to grow by the same amount. If the required return is 14%, what is the value of a share of Pale Hose? [$17.92] Etling Inc.s dividend is expected to grow at 6% for the next 2 years and then at 3% forever. The current dividend is $3 and the required return is 16%, what is the price of the stock? [$25.09]

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13. Use the following stock quote to answer the next four questions. 52 Weeks Hi Lo 126.25 72.5 a. b. c. d. Yld % 1.32 Vol 100s 20925

Stock Citicorp

Sym CCI

Div 1.30

PE 16

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, a good estimate of EPS over the last four quarters is [$6.15] Assume that Citicorp paid a $1.12 annual dividend in the previous period. What is the dividend growth rate based on this 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%]