Chapter 9 Finance

40.   A stock you are interested in paid a dividend of $1 last year.  The anticipated growth rate in dividends and earnings is 25% for the next 2 years before settling down to a constant 5% growth rate.  The discount rate is 12%.  Calculate the expected price of the stock.

            A)  $15.38

            B)   $20.50

            C)   $21.04

            D)  $22.27

            E)   $26.14

Answer: C  

            Rationale:

            Price = $1.00(1.25)/1.12 + $1.25(1.25)/1.2544 + [$1.5625(1.05)/(.12-.05)]/1.2544 = $21.04

39. A stock you are interested in paid a dividend of $1 last year. The anticipated growth rate in dividends and earnings is 20% for the next year and 10% the year after that before settling down to a constant 5% growth rate. The discount rate is 12%. Calculate the expected price of the stock.

D1=1.2, D2=1.32, P2=1.386/(.12-.05) = 19.8. Discount all to present. CF0=0, CF1=1.2, CF2=1.32+19.8, i=12, NPV = ? = 17.9082 = P0

37. The Lory Company had net earnings of $127,000 this past year.  Dividends were paid of $38,100 on the company's equity of $1,587,500.  If Lory has 100,000 shares outstanding with a current market price of $11.625 per share, what is the required rate of return?

            A)  4.2%

            B)   6%

            C)   9%

            D)  14%

            E)   None of the above.

Answer: C  

            Rationale:

            R = Div/P0 + g = (.381(1.056))/11.625)+.056 = (.40/11.625)+.056 = .0346 + .056 = .0906 = 9%

19. The Double Dip Co. is expecting its ice cream sales to decline due to the increased interest in healthy eating. Thus, the company has announced that it will be reducing its annual dividend by 5% a year for the next two years. After that, Double Dip will maintain a constant dividend of $1 a share. Last year, the company paid $1.40 per share. What is this stock worth to you if you require a 9% rate of return?

a. $10.86

b. $11.11

c. $11.64

d. $12.98

e. $14.23

Chapter 13....