# Finance scenarios; stock prices

10.) A firm pays a $3.80 dividend at the end of year one (D1), has a stock price of $50, and a constant growth rate (g) of 4 percent.

Compute the required rate of return (Ke).

11.) Tom Busby owes $20,000 now. A lender will carry the debt for four more years at 8 percent interest. That is, in this particular case, the amount owed will go up 8 percent per year for four years. The lender then will require Busby to pay off the loan over 12 years at 11 percent interest. What will his annual payments be?

12.) A financial analyst is attempting to asses the future dividend policy of Environmental Systems by examining its life cycle. She anticipates no payout of earnings in the form of cash dividends during the development stage (I). During the growth stage (II), she anticipates 10 percent of earnings will be distributed as dividends. As the firm progresses to the expansion stage (III), the payout ratio will go up to 45 percent, and eventually reach 60 percent during the maturity stage (IV).

a. Assuming earnings per share will be the following during each of the four stages, indicate the cash dividend per share (if any) during each stage.

Stage I $ .15

Stage II 1.80

Stage III 2.60

Stage IV 3.10

b. Assume in Stage IV that an investor owns 275 shares and is in a 31 percent tax bracket, what will be the investor's aftertax income from the cash dividend?

c. In what two stages is the firm most likely to utilize stock dividends or stock splits?

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#### Solution Preview

10.) A firm pays a $3.80 dividend at the end of year one (D1), has a stock price of $50, and a constant growth rate (g) of 4 percent.

Compute the required rate of return (Ke).

Use the dividend discount model to get the required return. The formual for dividend discount model is

Required Return ke = D1/Price + g

Ke = 3.80/50+0.04

Ke=11.6%

11.) Tom Busby owes $20,000 now. A lender will carry the debt for four more years at 8 percent interest. That is, in this particular case, the amount owed will go up 8 percent per year for four years. The lender then will require Busby to pay off the loan over 12 years at 11 percent interest. What will his annual payments be?

We first need to find out the amount at the end of four years. We have to compute the future value. We use the FVIF table to calculate the ...

#### Solution Summary

The solution has various finance questions relating to required rate of return, annual payments, after tax income and stock dividends and stock splits