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Stock, Dividends, and Financial Ratios

1. Patience Inc. just got paid a dividend of $2.35 per share on its stock. The dividends are expected to grow at a constant rate of 4.5% per year, indefinitely. If investors require an 11% return on this stock, what is the current price? What will the price be in 3 years? In 15 years?

2. The next dividend payment by Moss Co. will be $2.45 per share. The dividends are anticipated to maintain a 5.5% growth rate, forever. If the stock currently sells for $48.50 per share, what is the required return?

3. For the company in the previous problem, what is the dividend yield? What is the expected capital gains yield?

4. Ziggs Corp. will pay a $3.85 per share dividend next year. The company pledges to increase its dividend by 4.75 percent per year, indefinitely. If you require a 12% return on your investment, how much will you pay for the company's stock today?

5. B Inc. is expected to maintain a constant 5.8 percent growth rate in its dividends, indefinitely. If the company has a dividend yield of 4.3%, what is the required return on the company's stock?

6. Suppose you know that a company's stock currently sells for $65 per share and the required return on the stock is 11%. You also know that the total return on the stock is evenly divided between capital gains yield and dividend yield. If it's the company's policy to always maintain a constant growth rate in its dividends, what is the current dividend per share?

7. Bow Company pays a constant $13 dividend on its stock. The company will maintain this dividend for the next
8 years and will then cease paying dividends forever. If the required return on this stock is 9% what is the current share price?

8. Gesto Inc. has an issue of preferred stock outstanding that pays $4.50 dividend every year, in perpetuity. If the issue currently sells for $79.85 per share, what is the required return?

9. The stock price of Jenkins Co. is $53. Investors require a 12% rate of return on similar stocks. If the company plans to pay a dividend of $3.15 next year, what growth rate is expected for the company's stock price?

10. G.com has a new issue of preferred stock it calls 20/20 preferred. The stock will pay a $20.00 dividend per year, but the first dividend will not be paid until 20 years from today. If you require a 7% return on this stock, how much should you pay today?

11. Alex Corp. will pay a dividend of $2.60 next year. The company has stated that it will maintain a constant growth rate of 4.5% a year forever. If you want 15% rate of return, how much will you pay for the stock? What is you want a 10% rate of return? What does this tell you about the relationship between the required return and the stock price?

Solution Preview

1. Patience Inc. just got paid a dividend of $2.35 per share on its stock. The dividends are expected to grow at a constant rate of 4.5% per year, indefinitely. If investors require an 11% return on this stock, what is the current price? What will the price be in 3 years? In 15 years?

Pt = Dt × (1 + g) / (R - g)

P0 = D0 (1 + g) / (R - g) = $2.35 (1.045) / (.11 - .045) = $37.78

P3 = D3 (1 + g) / (R - g) = D0 (1 + g)^4 / (R - g) = $2.35 (1.045)^4 / (.11 - .045) = $43.11

P15 = D15 (1 + g) / (R - g) = D0 (1 + g)^16 / (R - g) = $2.35 (1.045)^16 / (.11 - .045) = $73.12

Other way:

P3 = P0(1 + g)^3 = $37.78(1 + .045)^3 = $43.11

P15 = P0(1 + g)^15 = $37.78(1 + .045)^15 = $73.12

2. The next dividend payment by Moss Co. will be $2.45 per share. The dividends are anticipated to maintain a 5.5% growth rate, forever. If the stock currently sells for $48.50 per share, what is the required return?

R = (D1 / P0) + g = ($2.50 / $48.50) + .055 = .1065 or 10.65%

3. For the company in the previous problem, what is the dividend yield? What is the expected capital gains ...

Solution Summary

The solution examines stock, dividends and financial ratios.

$2.19