A firm has just paid an annual dividend of $3 per share (D0) of common stock. If
ID: 2620675 • Letter: A
Question
A firm has just paid an annual dividend of $3 per share (D0) of common stock. If the expected long?run growth rate for this firm is 10 percent, and if you require an annual rate of return of 16 percent, then how much should you be willing to pay for a share of this stock?
$61
$49
$58
$35
$55
Which of the following types of compounding will cause a deposit of money to increase most rapidly?
annual
semi-annual
quarterly
daily
You borrow $2,000 to buy a car at 12% interest compounded monthly. How much are your monthly payments if your plan to pay off the auto in three years?
$71.81
$128.30
$55.55
$66.42
$61
$49
$58
$35
$55
Explanation / Answer
Answer to Question 1:
Recent Dividend, D0 = $3
Growth Rate, g = 10%
Required Return, r = 16%
D1 = $3.00 * 1.10 = $3.30
Current Price = D1 / (r - g)
Current Price = $3.30 / (0.16 - 0.10)
Current Price = $55
Answer to Question 2:
Deposit of money will increase most rapidly if compounding period is maximum.
Daily compounding will cause a deposit of money to increase most rapidly.
Answer to Question 3:
Amount borrowed = $2,000
Annual Interest Rate = 12%
Monthly Interest Rate = 1%
Period = 3 years or 36 months
Monthly Payment * PVIFA(1%, 36) = $2,000
Monthly Payment * (1 - (1/1.01)^36) / 0.01 = $2,000
Monthly Payment * 30.10751 = $2,000
Monthly Payment = $66.42
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