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Investment Questions

1. Sam's Company expects to pay a dividend of $6 per share at the
end of year one, $9 per share at the end of year two, and then be sold
for $136 per share at the end of year two. If the required rate on
the stock is 20%, what is the current value of the stock?

2. FastGrow is a no growth firm and has 2 million shares
outstanding. It is expected to earn a constant $20 million per year.
If all earnings are paid out as dividends and the cost of capital is
10%, calculate the current price per share for the stock.

3. Given a stock price of $39.77 and an expected return to
shareholders of 12.4%, what is the likely growth rate if the annual
dividend next year is expected to be $3.50?

4. A firm decides to pay 40% of its $5.00 earnings per share as a
dividend. If the remaining is invested at 18% ROE and the firm's
expected return is 12%, what is the NPVGO?

Solution Preview

1. Sam's Company expects to pay a dividend of $6 per share at the
end of year one, $9 per share at the end of year two, and then be sold
for $136 per share at the end of year two. If the required rate on
the stock is 20%, what is the current value of the stock?

P0 = PV of Dividend Year 1 + PV of Dividend Year 2 + PV of Price at the end of Year 2
P0 = 6/(1 + 0.20)1 + 9/(1 + 0.20)2 + 136/(1 ...

Solution Summary

This solution is comprised of a detailed explanation to answer the investment questions.

$2.19