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3. What is the percentage total return on a stock that had an initial price of $70 per share, paid a dividend of $2.50 per share for the year, and had an ending price for the year of $74.50?

5. What is the expected rate of return on a portfolio where 20% is invested in Stock X, 30% in Stock Y, and 50% in Stock Z if the expected returns on the three stocks are 10%, 18%, and 13%, respectively?

6. You need to decide whether to purchase a particular machine which will be obsolete in 10 years no matter what you do. The machine will increase your cash flow by $180,000 per year. The machine costs $1,000,000 today, but will decrease in price by $100,000 per year until it reaches a price of $500,000 where it will remain for the remainder of the time it is useful. If your required rate of return is 12%, should you purchase the machine, and if so, when?

7. What is a company?s payout ratio if it just declared an annual dividend of $0.50 on an earnings per share of $8?

8. What is a company?s cost of equity if it has no debt, but can borrow at 9%, and has a WACC of 15%, and a tax rate of 35%? What would the cost of equity be if the firm converted to 25% debt?

9. What is a company?s cost of equity if it just issued a dividend of $2.50 per share on a share valued currently at $40, and where the company is expected to maintain a 7% growth rate in that dividend indefinitely?

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The solution has questions relating to return on stock, WACC and payout ratio.

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3. What is the percentage total return on a stock that had an initial price of $70 per share, paid a dividend of $2.50 per share for the year, and had an ending price for the year of $74.50?

Percentage Total return = Total Income/Initial Investment
The total income is the dividend of $2.50 and the gain from the increase in share price of $4.50. The total income is $7. The initial investment is $70.
Percentage Total return = 7/70=10%

5. What is the expected rate of return on a portfolio where 20% is invested in Stock X, 30% in Stock Y, and 50% in Stock Z if the expected returns on the three stocks are 10%, 18%, and 13%, respectively?

Expected Return on Portfolio = Sum(percentageXexpected return)
multiply the percentage investment of each stock by its respective return and add up all the resultant figures.
Expected Return = 0.20X10% + 0.30 X 18% + ...

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