Self-Assessment HW5B (Value of Common Stock, Expected Rate of return on Common Stock)

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Finance

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Nov 24, 2024

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Question 1 The last dividend of Delta, Inc. was $10.90, the growth rate of dividends is expected to be 4.46 percent, and the required rate of return on this stock is 8.38 percent. What is the stock price according to the constant growth dividend model? Round the answer to two decimal places. Your Answer: 290.46 Answer w Hide Check my answer The formula is Do *(1+g)/(r-g), where Dy s the last year dividend gis the constant growth rate ris the required rate of return $10.90 *(1+0.0446)/(0.0838 - 0.0446) = 290.46 Question 2 The next year the common stock of Gold Corp. will pay a dividend of $2.63 per share. If the company is growing at a rate of 3.51 percent per year, and your required rate of return is 11.94 percent, what is Gold's company stock worth to you? Round the answer to two decimal places. Your Answer: 31.20 Answer w Hide Check my answer The formula is Do *(1+g)/(r-g)= D1/(r-g), where Dy is the last year dividend Dy is the next year dividend gis the constant growth rate ris the required rate of return In this problem “the next year” dividends is given, which is D1, so $2.63/(0.1194 - 0.0351) = $31.20
Question 3 The Black Forest Cake Company just paid an annual dividend of $7.25. If you expect a constant growth rate of 3.06 percent, and have a required rate of return of 12.19 percent, what is the current stock price according to the constant growth dividend model? Round the answer to two decimal places. Your Answer: (oo ) Answer ‘W Hide Check my answer The formula is Do *(1+)/(r-g), where Dy is the last year dividend gis the constant growth rate ris the required rate of return In this problem the company “just paid dividend”, so it is Do $7.25%(1+0.0306)/(0.1219-0.0306) = 81.84 Question 4 You are considering the purchase of a share of Alfa Growth, Inc. common stock. You expect to sell it at the end of one year for §99.51 per share. You will also receive a dividend of $4.99 per share at the end of the next year. If your required return on this stock is 8.23 percent, what is the most you would be willing to pay for Alfa Growth, Inc. common stock now? Round the answer to two decimal places. Your Answer: 96.55 Answer W Hide Check my answer The value of common stock is the present value of future cash flows. In this case “future cash flows” are the next year selling price and the next year dividend. We have to discount these cash flows one year back to the present. ($99.51 + 4.99)/(1+0.0823) = $96.55
Question 5 Green Company’s common stock is currently selling for $82.09 per share. Last year, the company paid dividends of $3.31 per share. The projected growth at a rate of dividends for this stock is 4.65 percent. Which rate of return does the investor expect to receive on ths stock if it is purchased today? Round the answer to two decimal places in percentage form. (Write the percentage sign in the "units" box). Your Answer: 887 % Answer units W Hide Check my answer Do *(1+g)/(r-g) = Pg, where Dy is the last year dividend gis the constant growth rate ris the required rate of return Py s the current market price So the rate of return Do*(1+g) / Pol + & [$3.31°(1+0.0465)/$82.09] + 0.0465 = 8.87% Question 6 Digging Deep Company's common stock is currently selling for $181.91 per share. Next year, the company dividend is expected to be $5.87 per share. The projected growth at a rate of dividends for this stock is 3.86 percent per year. What rate of return does the investor expect to receive on this stock if he or she purchases the stock today? Round the answer to two decimal places in percentage form.(Write the percentage sign in the "units” box). Your Answer: 7.09 Answer units w Hide Check my answer Do *(1+g)/(r-g)= D1/(r-g) = Pg, where Dy is the last year dividend Dy is the next year dividend gis the constant growth rate ris the required rate of return Py is the current market price In this problem “the next year” dividends is given, which is D1, so So the rate of return =r=[Dq / Pol + g [$5.87/$181.91] + 0.0386 = 7.09%
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