Chapter 7 problems

What is the price of a stock at the end of one year (P1) if the dividend for year 2 (D2) is $5, the price for year 2 (P2) is $20, and the discount rate is 10%?

$22.73 P1 = ($5 + $20)/ 1.10 = $22.73

If a zero-dividend stock is purchased for $80 and sold one year later for $84, the 1-year return is _____ %.

5% (84/80) - 1 = 5%

What is the value of a stock if next year's dividend is $6, the discount rate is 11% and the constant rate of growth is 3%?

6 * (1+.03) = 6.18 6.18/(0.11-0.03) = 75

A zero-growth stock pays a dividend of $2 per share and has a discount rate of 10% what will the stock's price be?

P0 = D1/(r-g) P0 = $2/ (0.10) = $20

What is the total return for a stock that currently sells for $50, just paid a $1.75 dividend, and has a constant growth rate of 8%?

R = D1/P0 + g R = 1.75 / 50 + 0.08 = 11.78%