5) You buy a stock for which you expect to receive an annual dividend of $2.10 f

Question

5) You buy a stock for which you expect to receive an annual dividend of $2.10 for the fifteen years that you plan on holding it. After 15 years, you expect to sell the stock for 32.25. What is the present value of a share for this company if you want a 10% return?  5) _______<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

A) $31.41              B) $7.72 C) $23.69              D) $15.97

6) The Belgium Bike Company just paid an annual dividend of $1.12. If you expect a constant growth rate of 4% and have a required rate of return of 13%, what is the current stock price according to the constant growth dividend model?         6) _______

A) $12.44

B) $13.46

C) $12.94

D) There is not enough information to answer this question.

7) In a stream of past dividends, the initial dividend is $0.75 and the most recent dividend is $1.25. The number of years between these two dividends (n) is 8 years. What is the average growth rate during this eight-year period? Use a calculator to determine your answer.       7) _______

A) 6.59%               B) 6.69%               C) 6.72%               D) 6.62%

8) Boyer Corp. has outstanding borrowings. One of these borrowings is nonconvertible preferred stock (cumulative) with a par value of $75 and an annual dividend rate of 8.25%. This preferred stock is currently selling for $56.46 per share. What is the yield or return (r) on this preferred stock?            8) _______

A) 10.432%          B) 10.959%           C) 10.395%          D) 10.623%

9) Andre is considering an investment in Pollard's Inc. and has gathered the following information. What is the expected return for a share of the firm's stock?

                9) _______

A) 15.00%            B) 16.50%             C) 65.00%             D) 45.00%

Explanation / Answer

5. Share price = 2.10/1.10^1 + 2.10/1.10^2 + 2.10/1.10^3 + ... + 2.10/1.10^15 + 32.25/1.1^15 = 23.69

So the answer is option C

6. Next year dividend = 1.12*1.04 = 1.1648

Current stock price = next year dividend / (required rate of return - growth rate) = 1.1648 / (13%-4%) = 12.94

So the answer is option C

7. Average growth rate = (1.25/0.75)^(1/8) - 1 = 6.59%

So the answer is option A

8. Dividend = 8.25%*75 = 6.1875

So rate of return = dividend / stock price = 6.1875 / 56.46 = 10.959%

So the answer is option B

9. Expected return = 0.2*-10%+0.5*10%+0.3*45% = 16.5%

So the answer is option B

Hope this helped ! Let me know in case of any queries.

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