Question

A stock that pays a constant dividend of $2.50 forever currently sel ls for $24.00. What is the required rate of return? 13. A) B) C) D) E) 9.6.0 % 10.4% 12.0% 12.5% 13.0% Suppose a firm invests $900 in a project. The initial cost is depreciated straight- Tine to zero over 3 years. Net income from the project is $100, $125 and $140 in each of the three years of the project's life. What is the average accounting return? A) B) C) D) E) 14 18.25% 20.28% 27.04% 30.56% 38.83 % McGonigal's Meats, Inc. currently pays no dividends. You overhear the CFO tell the CEO that the plan is to begin paying dividends in 3 years. The first dividend will be $1.00 and dividends are expected to grow at 4% thereafter. Given required return of 15%, what would you pay for the stock today? A) B) C) D) 15. $6.87 $7.56 $8.29 $10.00 $10.50 The Farming Equipment Manufacturing Co. has not kept pace with the times and is slowly seeing its sales and market share decline. Based on this trend, the firm recently announced that its next annual dividend will be $0.55 a share and that all future dividends will be decreased by 1.5 percent annually. You require a 9 percent rate of return on this stock. What is the price of the stock today? A) $5.16 B) $5.24 C) $5.32 D) $7.09 E) $7.33 16.

Answer 1

13 Constant annual dividend, DPS = $2.50 Per share Current price of stock, PO = $24 Required rate of return, RR = DPS/PO = $2.50 / $24 = 0.104166667 = 10.4166667 % = 10.4 % (Rounded) Ans : Required rate of return , RR = 10.4%

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