Problem 1 You estimate that the growth rate in dividends for GDL will be constan

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Problem 1 You estimate that the growth rate in dividends for GDL will be constant for the foreseeable future. How much should you pay for a share of the stock that if it has a dividend yield of 5.30%, requires a 1 1% rate of return, and is expected to sell for S45 two years from now? Ans: 40.28 Problem 2. If the dividend yield for year 1 is expected to be 6% based on the current price of $25, what will the year 4 dividend be if dividends grow at a constant 4%? Ans: 1.69 Problem 3. You expect a stock to pay dividends of $0.75, S0.88, $1.45, $2.10 and $3.12 over the next 5 years. You will receive the first dividend exactly 1 year from now. You expect the stock to sell for a price of $42.95 five years from now. If the discount rate is 15%, what is the price of the stock today? Ans: 26.38 Use the following information for problems 4 & 5 You expect ABC Company to pay a dividend of $2.25 next year. After that, you think dividends will grow by 12% for 4 years, 9% the year after that, and then maintain constant growth of 5% per year forever. You require a 14% return to invest in ABC. Problem 4. How much would you pay for a share of ABC stock today? Ans: 31.80 Problem 5. What is the expected pric e of the stock next year? Ans: 34.00 Use the following information for problems 6 & 7 A constant growth stock is currently selling for $55 per share has a 13% expected return and 6% expected capital appreciation the price will increase by 6% per year Problem 6. What is the next expected dividend? Ans:3.85 Problem 7. What is the expected price of the stock next year? Ans:58.30 Problem8 The dividend for ABC next year is expected to be $0.95 and the stock sells for $20 today. Dividends are expected to grow at a rate of 3.75% forever. what is the required rate of return? Ans 8.50% Problem9 ABC Inc. has issued preferred stock. Preferred stock pays a constant dividend forever. ABC preferred will pay a $4 dividend forever. Investors require a 9% rate of retum on this preferred stock. What is the market price today? Ans 44.44 Problem 10

Explanation / Answer

problem 1)

dividend yield , dy = 5.30% = 0.0530

required return , r = 11% = 0.11

price at the end of 2 years , p2 = 45

constant growth rate of dividends , g = r - dy = 11-5.3 = 5.7% = 0.057

let current price of stock = p0

p2 = p0*(1+g)2

p0 = p2/(1+g)2 = 45/(1.057)2 = 45/1.117249 = $40.27750 or $40.28 ( rounding off to 2 decimal places)

problem 2)

expected dividend yield , dy = 6% = 0.06

current price , p0 = 25

dividend growth rate , g = 4% = 0.04

let dividend per share expected in year 1 = d1

dy = d1/p0

d1 = dy*p0 = 0.06*25 = $1.5

dividend expected at the end of year 4 = d1*(1+g)3 = 1.5*(1.04)3 = $1.687296 or $1.69 ( rounding off to 2 decimal places)

problem 3)

let

dividend expected at the end of year 1 = d1 = $0.75

dividend expected at the end of year 2 = d1 = $0.88

dividend expected at the end of year 3 = d1 = $1.45

dividend expected at the end of year 4 = d1 = $2.10

dividend expected at the end of year 5 = d1 = $3.12

price of stock 5 years from now , p5 = $42.95

discount rate , r = 15% = 0.15

let stock price today = p0

p0 = [d1/(1+r)] +  [d2/(1+r)2] +  [d3/(1+r)3] +  [d4/(1+r)4] +  [(d5+p5)/(1+r)5]

p0 =  [0.75/(1.15)] +  [0.88/(1.15)2] +  [1.45/(1.15)3] +  [2.10/(1.15)4] +  [(3.12+42.95)/(1.15)5]

p0 = [0.6521739] + [0.6654064] + [0.9533985] + [1.2006818] + [22.9049321]

p0 = $26.3765927 or $26.38 ( rounding off to 2 decimal places)

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