QUESTION 1 XYZ company paid a dividend of 1.50 today. It expects dividend paymen

Question

QUESTION 1

XYZ company paid a dividend of 1.50 today. It expects dividend payments to increase by 15% every year for the next three years before resuming a normal growth of 6%. What should you pay for this stock if you demand a 16% rate of return?  Show equation and work.

a. $21.24

b. $19.92

c. $26.65

d. $24.98

e. $23.25

QUESTION 2

ABC Inc. company is not expected to pay any dividends for three years while it attempts to restructure its business. They anticipate paying $1.20 in year four and thereafter growing at a rate of 6%. What should we pay for the stock if we demand a 15% rate of return? Show equation and work.

a. $8.77

b. $10.96

c. $14.24

d. $17.79

e. $9.50

QUESTION 3

A company has 200 shares. What is the minimum number of shares required for a minority shareholder to elect one board member out of 3 members to be elected?  Show equation and work.

a. 51

b. 101

c. 41

d. 126

e. 76

QUESTION 4

QRS company is expected to pay a dividend of $2.80 next year. Its dividends are expected to grow at a rate of 5%. If the price of the stock is $80, what rate of return are investors demanding? Show equation and work.

a. 9.00%

b. 8.43%

c. 8.50%

d. 8.68%

e. 9.62%

a. $21.24

b. $19.92

c. $26.65

d. $24.98

e. $23.25

Explanation / Answer

1)

Dividend in year 1 = 1.5 * 1.15 = 1.725

Dividend in year 2 = 1.725 * 1.15 = 1.98375

Dividend in year 3 = 1.98375 * 1.15 = 2.281313

Price at year 3 = D1 / k - g

Price at year 3 = [2.281313 ( 1.06) / 0.16 - 0.06

Price at year 3 = 2.418191 / 0.1

Price at year 3 = 24.18191

Current price = 24.18191 / ( 1 + 0.16)3 = 15.492326

Present value of year 1 dividend = 1.725 / ( 1 + 0.16) = 1.487069

Present value of year 2 dividend =  1.98375 / ( 1 + 0.16)2 = 1.474249

Present value of year 3 dividend = 2.281313 / ( 1 + 0.16)3 = 1.461541

Current stock price = 1.461541 + 1.474249 + 1.487069 + 15.492326

Current stock price = $19.92

2)

Present value at year 3 = D1 / k - g

Present value at year 3 = 1.2 / 0.15 - 0.06

Present value at year 3 = 1.2 / 0.09

Present value at year 3 = 13.333

Current stock price = 13.333/ ( 1 + 0.15)3

Current stock price = $8.77

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