1.Suppose a company has just paid a dividend of $5.10 a share (DIV0 = $5.10) and is expected to increase that amount by 4.25 percent per year (this means that g =
4.25%). If you are planning to buy a block of shares of this stock next year, how much should you expect to pay for each share if the market rate of return for this
type of security is 11 percent at the time of your purchase? That is, please find P2021.
Stock Price Next Year (P2021) =
2.In this problem please find the net present value (NPV) of a capital investment project which has an up front cash outflow (-CF0) of $29,750 and then followed by the
following cash inflows presented in the table below? Assume the risk-adjusted required return (r) is 16.75 percent.
NPV =
3.Assume that the common stock of a popular local company sells for $18.75 a share (therefore, P0 = $18.75). The stock is expected to pay $2.15 per share next year
when the annual dividend to its shareholders is paid. This well known company has stable and predictable pattern of increasing its dividends by 2.5 percent annually
and its CFO expects this pattern continue doing so (therefore g = 2.5%). Under the expectation assumption that its common stock behaves as a constant growth stock
under the Gordon growth model, what is the market rate of return on this stock (that is, find r)?
Market Rate of Return (or Required Rate of Return, r) =
4.Imagine that a software company declared a $1.25 per share annual dividend last week (therefore, DIV0 = $1.25). The company's dividends are expected to increase by
3.35 percent annually and will remain at that rate indefinitely (g = 3.35%). What is one share of this stock worth to you today if your required rate of return is 12.5
percent? Find P0.
Stock Price Today, P0 =
Sample Solution