FIN 125 Exam 2: Chapter 8 Problems

Weisbro and Sons common stock sells for $31 a share and pays an annual dividend that increases by 5.5 percent annually. The market rate of return on this stock is 9.5 percent. What is the amount of the last dividend paid by Weisbro and Sons?

$31 = [D(1 + 0.055) / (0.095 - 0.055)] D = $1.18

Shore Hotels just paid an annual dividend of $1.50 per share. The company will increase its dividend by 7 percent next year and will then reduce its dividend growth rate by 2 percentage points per year until it reaches the industry average of 3 percent dividend growth, after which the company will keep a constant growth rate forever. What is the price of this stock today given a required return of 14 percent?

0 = CF 0 1.50 * 1.07 = CF 1 Ans * 1.05 + (Ans (1 + 0.03) / (0.14 - 0.03))= CF 2 i/YR = 14% NPV = 14.85

Lohn Corporation is expected to pay the following dividends over the next four years: $13, $9, $6, and $2.75. Afterward, the company pledges to maintain a constant 5 percent growth rate in dividends forever. If the required return on the stock is 10.75 percent, what is the current share price?

0 = CF 0 13 = CF 1 9 = CF 2 6 = CF 3 2.75 + [2.75(1 + 0.05) / (0.1075 - 0.05)] = CF 4 i/YR = 10.75 NPV = 58.70

Brickhouse is expected to pay a dividend of $2.50 and $2.20 over the next two years, respectively. After that, the company is expected to increase its annual dividend at 2.6 percent. What is the stock price today if the required return is 10 percent?

0 CF 0 2.50 CF 1 2.20 + [(2.20(1 + 0.026) / (0.10 - 0.026)] = 32.70 = CF 2 i/YR = 10% NPV = 29.30

Railway Cabooses just paid its annual dividend of $2.70 per share. The company has been reducing the dividends by 11.8 percent each year. How much are you willing to pay today to purchase stock in this company if your required rate of return is 13 percent?

2.70 (1 + (-0.118)) / (0.13 + 0.118) = $9.60

Electric Utilities preferred stock will pay an annual dividend of $12 per share in perpetuity beginning 8 years from now. What is one share of this stock worth today if the market requires a return of 9.5 percent?

Find the price of the Perpetuity PV = D/R Then find the present value of this amount 7 years from now because it begins 8 years from today.

A7X Corp. just paid a dividend of $1.55 per share. The dividends are expected to grow at 21 percent for the next eight years and then level off to a growth rate of 3.5 percent indefinitely. If the required return is 12 percent, what is the price of the stock today?

Because the dividend was just paid, you have to start with $0 as CF 0 because you did not get the 1.55 0 = CF 0 1.55 *1.21 = 1.875 = CF 1 1.875 * 1.21 = x = CF 2 ... 7.122 + [7.122(1 + 0.035) / (0.12 - 0.035)] = 93.8456 = CF 8 i/YR = 12% NPV = 52.86

Jensen Shipping currently has an EPS of $2.31, a benchmark PE of 13.5, and an earnings growth rate of 2.3 percent. What is the target share price 4 years from now?

EPS * (1.023)^4 * PE

The Bell Weather Co. is a new firm in a rapidly growing industry. The company is planning on increasing its annual dividend by 20 percent a year for the next 4 years and then decreasing the growth rate to 3 percent per year. The company just paid its annual dividend in the amount of $3.40 per share. What is the current value of one share of this stock if the required rate of return is 8.90 percent?

Firm just paid the dividend so the first cash flow is in the first year. 0 = CF 0 3.40 * 1.2 = CF 1 * 1.2 = CF 2 * 1.2 = CF 3 * 1.2 + [(ans)(1 + 0.03) / (0.089 - 0.05)] = CF 4 i/YR = 8.9% NPV = 104.95