1. The Frisco Company just paid $2.20 as its annual dividend. The dividends have

Question

1. The Frisco Company just paid $2.20 as its annual dividend. The dividends have been increasing at a rate of 4% annually and this trend is expected to continue. The stock is currently selling for $63.60 a share. What is the rate of return on this stock?

2. Heidi invested $3,000 and purchased shares of a German corporation when the exchange rate was $1,00=1.6 euro. After six months, she sold all of the share for 3,180 euro, when the exchange rate was $1.00=1.12 euro. No dividends were paid during the time Heidi owned the shares of stock. What is the amount of Heidi's gain or loss on this investment?

3. The common stock of Peachtree Paper, Inc., is currently selling for $40 a share. A dividend of $2.00 per share was just paid. You are estimating that this dividend will grow at a constant rate of 10%. (a) Using the constant growth DVM model, what is your required rate of return if $40 is a resonable trading price? (show all work)

(b) If Peachtree Papers is a new company that produces a relatively unknown product, is the constant growth model a good valuation method for a potential investor to use? Justify your answer.

Explanation / Answer

1. The Frisco Company just paid $2.20 as its annual dividend. The dividends have been increasing at a rate of 4% annually and this trend is expected to continue. The stock is currently selling for $63.60 a share. What is the rate of return on this stock?

Ke = Do*(1+g) /Po + g. Where,. Ke = Cost of Equity. Po = Current Equity Price. g si growth rate, Do = Current dividend

=(2.2*(1+4%))/63.6 + 4%

Retun on stock=7.60%

2. Heidi invested $3,000 and purchased shares of a German corporation when the exchange rate was $1,00=1.6 euro. After six months, she sold all of the share for 3,180 euro, when the exchange rate was $1.00=1.12 euro. No dividends were paid during the time Heidi owned the shares of stock. What is the amount of Heidi's gain or loss on this investment?

At start,$1.00= 1.6 Euro

So $3000= 3000*1.6= 4800 Euro

So Heidi Bought shares for 4800 Euro but sold for 3180 Euro.

At the time of sell exchage rate was ,$1.00=1.12 euro.

So for 3180 Euro Heidi will get , 3180/1.12= $2839.29

So their wil be a loss of (2839.29-3000=$160.71

The common stock of Peachtree Paper, Inc., is currently selling for $40 a share. A dividend of $2.00 per share was just paid. You are estimating that this dividend will grow at a constant rate of 10%. (a) Using the constant growth DVM model, what is your required rate of return if $40 is a resonable trading price? (show all work)

(b) If Peachtree Papers is a new company that produces a relatively unknown product, is the constant growth model a good valuation method for a potential investor to use? Justify your answer.

Required rate of return(Ke) = Do*(1+g) /Po + g. Where,. Ke = Cost of Equity. Po = Current Equity Price. g si growth rate, Do = Current dividend

=2*(1+10%)/40 + 10%

Required rate of return=15.5%

If Peachtree is a new company that produces a relatively unknown product then constant growth is not a good valuation model. Because constant growth can not be guarnted for lesser known product with no brand value. It may happen that sales will decline leading to bankruptcy and people even didnt notice about it

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