Purchase Solution

Expected Return and Pay Out

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1. Company A pays a dividend of \$2.40 and its stock price is expected to remain constant at \$16. What rate of return will an investor enjoy by owning the stock?

2. Company B pays a dividend of \$12. Its stock is expected to grow in price at a rate of 4%. How much should you pay for the stock if your expected rate of return is 12%?

3. If the market price of a share of common stock in Company C is \$52, the dividend is \$2.25, and shareholders expect annual growth in the stock price to be 12%, what is the annual total return the shareholders expect?

4. Suppose the Company D stock price is expected to grow 10% from its current market price of \$35. What dividend would be needed to satisfy a shareholder total expected return of 19%?

5. Company E has a stock selling for \$72 and an expected price growth rate of 3%. What dividend (in dollars) must the company pay to attract stock purchase by an investor that expects a 9.2% rate of return?

6. USP issues10-year bonds of \$1,000 face value, with a coupon (interest payment) of 5.5% (\$55). What is the current face value of the bonds if investors believe a yield to maturity should be 7%?

7. If you pay \$850 for a new ten year bond with a face value of \$1,000 and annual coupon payments of 6% (\$60), what is the yield to maturity?

8. Consider the Medfix balance sheet, provided as an Excel worksheet, and analyze the various listed shareholder payout options based on the scenario that follows:

Medfix has completed the compilation of its annual financial statements. Prior to finalization and publication, the company is considering various shareholder payout options and projects the following:

-Company operations in the year to come can be funded with \$500M less cash than it currently has on its balance sheet.
-Profits of \$700M for the coming year (the same as last year).

Analyze the effect of the following shareholder payout options on EPS, ROA, ROE, and Liquidity:

a. Pay off \$500M in long-term debt for which the average interest rate is 8%.
b. Pay dividend of \$500M to shareholders.
c. Buy back \$500M of outstanding stock at a per share price of \$50.

Recommend a shareholder payout option from the above or one of your choosing and support your recommendation.

Solution Summary

The following posting helps with various bond valuation problems. Concepts discussed include stock prices, expected rate of return, annual total return and dividends.

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1. Company A pays a dividend of \$2.40 and its stock price is expected to remain constant at \$16. What rate of return will an investor enjoy by owning the stock?
Market price \$16
Dividend \$2.40
Rate of return 15% =2.4/16

2. Company B pays a dividend of \$12. Its stock is expected to grow in price at a rate of 4%. How much should you pay for the stock if your expected rate of return is 12%?
Dividend \$12.00
Growth rate 4%
Rate of return 12%
Market price \$150 =12/(12% - 4%)

3. If the market price of a share of common stock in Company C is \$52, the dividend is \$2.25, and shareholders expect annual growth in the stock price to be 12%, what is the annual total return the shareholders expect?
Dividend \$2.25
Growth rate 12%
Market price \$52
Rate of return 16.33% =(2.25/52) + 12%

4. Suppose the Company D stock price is expected to grow 10% from its current market price of \$35. What dividend would be needed to satisfy a shareholder total expected return of 19%?
Growth rate 10%
Market price \$35
Rate of return 19%
Dividend \$3.15 =35 * (19% - 10%)

5. ...

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• B. Sc., University of Nigeria
• M. Sc., London South Bank University
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