Question

1. A company has reported $4 per share in earnings, and maintains a 50% dividend payout ratio. Its book value per share is $25. What is the expected growth rate in dividends?
   1. 4%
   2. 8%
   3. 12%
   4. 16%
2. Stormy-seas Corp has just paid a dividend of $3 per share out of earnings of $5 per share. What is the required rate of return on this stock if its book value is $40 and current market price is $52.50?
   1. 5%
   2. 6%
   3. 11%
   4. 12%
3. Pirate Corp. has just declared a dividend (to be paid next year) of $1.00. In the following two years, a non-sustainable growth of 50% is expected, and thereafter, the growth will slow down dramatically to 5% (sustainable). If investors require 15% return, what is the value of this stock today?
   1. $19.02
   2. $29.02
   3. $39.02
   4. $49.02
4. Realistic Corp.’s last dividend was $1.25. Over the next 7 years, the company is expected decline in growth from 40% down to 3%. If investors require 13% return on their investment, this stock’s value should be:
   1. $26.54
   2. $29.06
   3. $37.12
   4. $41.04

Answer 1

Answer to first question in the list: Option-(b): 8% Workings: Expected growth rate in dividends = Earnings per share x (1 - Payout ratio) / Book value per share $4 [1 - 50% = 1 -0.5 = 0.5 = 50%] Earnings per share Payout ratio Book value per share Expected growth rate in dividends 50% $25 8% ($4 x 50% / $25 = 0.08 = $2 / $25 = 8%]