Business Finance “Stocks” Name___________________ 80 points Score__________
MUST SHOW WORK
1. Calculate the dividend for year 15 if Do is $2.50 and growth is 6%. D15 = $__________ (3 pts.)
2. Calculate the dividend for each year from D1 through D5 assuming Do is $4 and growth is 7%. (10 pts.)
D1 = $
D2 = $
D3 = $
D4 = $
D5 = $
3. Calculate the price of the stock today if Do is $1.00 and growth is 6%. Assume the required rate of return on common stock, rs, is 10%. $_______(3 pts.)
4. If you know that the required rate of return, r, on Stock A is 12%, and the dividend yield is 5%, what is the capital gains yield?_____% (2 pts.)
5. If P1 is $24.61, and Po is $22.97, what is the capital gains yield? ______% (2 pts.) The total return, r, is 15%. What is the dividend yield? ______% (2 pts.)
6. If the dividend, D1, is $1.92, and Po is $23.50, what is the dividend yield? ____% If the total rate of return, r, is 14%, what is the capital gains yield? _____% (2 pts. each)
7. If the expected rate of return, rˆ, is less than the required rate of return, r, should you buy the stock? Yes — No. Circle your answer. 2 pts. If you already own the stock, should you keep it or sell it? Circle your answer. 2pts.
8. The price of preferred stock X is $65.00, and the dividend per share is 7% of the par value of $100. Calculate the required rate of return on the preferred stock, rp. _____% 4 pts.
9. If the required rate of return on preferred stock Y with an $8 dividend is 12%, what is the price of the stock? Vp = %___________ 4 pts.
10. Stock Z will pay a dividend of $3.00, but forecasts no growth in the dividend. The current price of the stock, Po, is $30. Calculate the required rate of return, rs. 4 pts.
11. If the dividend on this no growth stock is $1.15 and rs is 13%, calculate Po. 4 pts.
12. If the growth rate (g) is 6%, the price of the stock today (Po) is $24, the dividend today (Do) is $1.00, what is the dividend yield, the capital gains yield, and the total yield, r, (r = required rate of return or total yield). 6 pts. Dividend Yield ___________% Capital Gains Yield _____________% Total Yield (required rate of return) ______________%
13. What is the expected price of Stock C four years from now if growth (g) is 6%, and the investors are requiring 11%, (the required rate of return, r, is 11%), and the current dividend, Do, is $1.75. Calculate expected Pˆ4. 5 pts.
14. Suppose the dividend today, Do, is $2.50, and the growth rate (g) is expected to be 25% for the next three years, followed by a normal growth rate (g) of 6% thereafter. Assume the investors require 13%, rs. Calculate the value of the stock today, Po. This is the supernormal growth problem. 25 pts