FIN 500 WeekSeven Homework

Work should be done individually.Word-process your solutions within this template and show all steps used in arriving at the final answers. Incomplete solutions will receive partial credit. Copy and paste all necessary data and create tables as needed.”

Problem 1

Suppose a dividend of $1.25 was paid. The stock has a required rate of return of 11.2% and investors expect the dividend to grow at a constant rate of 10%. Complete parts (a) through (e) below.

a) Compute D₀, D₁, D₂,D₃ and D₇.

b) Compute the present value of the dividends for t = 3 years.

c) Compute the current market price.

Problem 2

Suppose a dividend that pays at $1.07 has a growth rate of 20% for the first 3 years. After the 3 years, there is a long-run growth rate of 8%. The stock has a required rate of return of 12.4%. Find the current market price of a share of common stock.

Problem 3

Assume the beta coefficient for a company’s stock is?= 0.2, the risk-free rate of return, r_RF, is 8% and the required rate of return on the market, r_M, is 14%. Assume the dividend expected during the coming year is D₁ = $2.50 and the growth rate is a constant 7%. Compute the price at which the company’s stock should sell.

Problem 4

A stock is expected to pay a dividend of $0.75 at the end of the year. The required rate of return is r_s = 10.5%, and the expected constant growth rate is g = 6.4%. What is the stock's current price?