Business Finance FIN 3200 ASSIGNMENT #3 Show all work including time lines for f

Question

Business Finance FIN 3200 ASSIGNMENT #3 Show all work including time lines for full credit] 1. Company X is expected to pay an year-end dividend of $5 a share on its common stock. After the dividend payment the stock is expected to sell at $110 per share. The required rate of return on the common stock is 15%. Then, calculate the current price of t Also calculate the dividend yield and capital gains yield for the stock. 2, A share of common stock has an expected long-run constant dividend growth rate of 7%, and the most recent dividend Do, was $5.00. The required rate of return on the common stock is 18%. Then, using the dividend growth model, calculate the current price of the stock. A share of common stock has an expected long-run constant dividend growth rate of 6%, and the most recent dividend Do, was $5.00. The stock is currently selling for $50 per share Calculate the required rate of return on the stock. Also calculate the dividend yield and capital gains yield for the stock 4 If the dividends on a preferred stock is $9 per year, and the required rate of return on the stock is 12%, then calculate the current price of the preferred stock. 5. For Stock A, the cash dividend expected one year from now is $9 [Di]. The dividends are expected to grow at a constant rate of 6% per year for ever. The required rate of return on the common stock is 15%. Then calculate the current price of the stock using the dividend growth model. A stock is currently selling for $50/share. The most recent dividend was $2.50/ share. If the firm maintains a constant growth rate for ever at 8%; (a) calculate the required rate of return for the stock. (b) calculate the dividend yield and capital gains yield for the stock 6.

Explanation / Answer

1. Current price of the stock = (Price of stock after dividend + dividend )/ (1+kke)

= ($110 + $5)/1.15

= $100 per share

Dividend and capital yield for the stock = (Dividend + capital gain)/ current price of stock *100

= ( $5 per share + ($110- $100))/ $100 *100

= $25 per share / $100 per share *100

= 25%

2. Current price of stock based on dividend growth model = [d0*(1+g)]/(ke-g)

= $5*1.07/(0.18-0.07)

= $48.64/-

3. Current price of stock(growth model) = D0*(1+g)/(ke-g)

$50 = $5*1.06/(ke-0.06)

$50*(ke-0.06) = $5.30

$50ke - $3 = $5.30

$50ke = $8.30

Ke = 16.60%

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