Ancient Items Co. just paid a $9 dividend and you required an 11 percent return

Question

Ancient Items Co. just paid a $9 dividend and you required an 11 percent return on this stock.

a. If management expects to reduce the dividend payout by 7 percent per year, what will you pay for a share of the stock today?

b. If management expects to increase the dividend payout by 5 percent per year, what will you pay for a share of the stock today?

The next dividend payment by SAF, Inc., will be $2 per share. The dividends are anticipated to maintain a 8 percent growth rate, forever and SAF stock currently sells for $26 per share.

a. what is the required rate of return

b. what is the ex[ected dividend shield?

c. what is the expected capial gains yeild?

Brink's Bank just issued some new preferred stock. The issue will pay a $3 annual dividend in perpetuity.

a. If the market requires an 8.5 percent return on this investment, how much does a share of preferred stock cost today?

b. if the market requires a 6 percent return on this inventest, how much does a share of preferred stock cost today?

Explanation / Answer

a)

D1 = 9*(1-0.07) = $ 8.37

g = -0.07

r = 0.11

Price = D1/ (r-g) = 8.37/(0.11+0.07) = 8.37/0.18 = $ 46.5

b)

D1 = 9*1.05 = $ 9.45

g = 0.05

r = 0.11

Price = D1/ (r-g) = 9.45/(0.11- 0.05) = 9.45/0.06 = $ 157.5

2)

a)

Price = D1/(r-g)

g = 0.08

D1 = 2

Price = 26

r- g = D1/price = 2/26

r= g + 2/26 =0.08 + 2/26 = 0.1569

Required rate of return = r = 15.69 %

b)

Dividend yield = 2/26 = 0.0769 = 7.69 %

c) Capital gains yield = ( 26 - Original price)/Original price

3)

a) Cost = 3/0.085 = $ 35.29

b) Cost = 3/0.06 = $ 50

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