Question

1.Golf World has a constant dividend growth rate of 10% and has just paid a dividend (D0) of $5.00. If the required rate of return is 15%, what will the stock sell for one year from now?

A) $90.00 B) $95.50 C) $ 100.00 D) $121.00

2.The dividend yield on AAA’s common stock is 5%. The company just paid a $4 dividend (D0), which will be $4.40 next year. The dividend growth rate (g) is expected to remain constant at the current level. What is the required rate of return on AAA’s stock?

A) 10.00% B) 13.00% C) 15.00% D) 20.00%

3.Shares of common stock of the Samson Co. offer an expected total return of 12%. The dividend is increasing at a constant 8% per year. The dividend yield must be:

A) -4% B) 4% C) 8% D) 12%

4.Stock A has a required return of 10%. Its dividend is expected to grow at a constant rate of 7% per year. Stock B has a required return of 12%. Its dividend is expected to grow at a constant rate of 9% per year. Stock A has a price of $25 per share, while Stock B has a price of $40 per share. Which of the following statements is most correct?

A.The two stocks have the same dividend yield. I

B.f the stock market were efficient, these two stocks should have the same price.

C.If the stock market were efficient, these two stocks should have the same expected return

D Statements A) and C) are correct.

5.You want to invest in a stock that pays $6.00 annual cash dividends for the next five years. At the end of the five years, you will sell the stock for $30.00. If you want to earn 10% on this investment, what is a fair price for this stock if you buy it today?

A) $41.37 B) $40.37 C) $22.75 D) $18.63

6.You want to invest in a stock that pays $5.00 annual cash dividends for the next four years. At the end of the four years, you will sell the stock for $20.00. If you want to earn 12% on this investment, what is a fair price for this stock if you buy it today?

A) $40.00 B) $43.90 C) $27.90 D) $25.42

7.Stock X has a required return of 12% with a dividend yield of 5%. Stock Y has a required return of 10% with a dividend yield of 3%. Both stocks currently sell for $25 per share and their dividends will grow at a constant rate forever. Which of the following statements is most correct?

a.Stock X pays a higher dividend per share than Stock Y.

b.Stock X has a lower expected growth rate than Stock Y.

c.One year from now, the two stocks are expected to trade at the same price.

d.Statements A) and C) are correct.

Answer 1

1. D) $121

Using Dividend Growth Model, we can compute the stock price, as below:

DO * (1 +92 Stock Price one year from now (P1) = - k-g

where,

k = required return

g = growth rate

D0 = last dividend.

Stock Price one year from now (P1) = 5*(1 +0.10) 0.15-0.10

6.05 Stock Price one year from now (P1) = 0.05

Stock Price one year from now (P1) = $121

Hope this will help, please do comment if you need any further explanation. Your feedback would be highly appreciated.

*Please ask other questions separately.