10. Coyote Beauty Products just paid a dividend of $10 (i.e., D0 = 10.00). Its d

ID: 2764994 • Letter: 1

Question

10.

Coyote Beauty Products just paid a dividend of $10 (i.e., D0 = 10.00). Its dividends are expected to grow at a 5% annual rate forever. If you require a 12% rate of return on investments of this risk level, what is the most you should pay for a share of Coyote's stock?

Question 10 options:

$142.86

$150

$83.33

$87.50

None of the above is within $1 of the correct answer

Assume that a constant growth stock is currently selling at its equilibrium price of $52.50 per share. All else constant, if the required rate of return of the stock increases, the price of the stock will:

Question 9 options:

increase

decrease

remain unchanged

either increase or decrease depending on the dividend paid in year 0.

either increase or decrease depending on the stock's required rate of return.

$142.86

$150

$83.33

$87.50

None of the above is within $1 of the correct answer

Question 9 options:

increase

decrease

remain unchanged

either increase or decrease depending on the dividend paid in year 0.

either increase or decrease depending on the stock's required rate of return.

Explanation / Answer

Calculation of Price you should pay for a share of Coyote's stock:

Formula :

Price = Expected Dividend / (Required Rate - Growth rate)

Growth rate = 5%

Expected Dividend = Current Dividend * (1+ Growth rate)

= 10 * (1+5%)

= $10.50

Required rate = 12%

Price = 10.50 / (12%- 5%)

Price = 10.50 /0.07

Price = $150

Hence you should pay $ 150 for a share of Coyote's stock