Question

Question 1

1. What does it mean for shareholder in a particular company to have limited liability?

2. An investor’s required rate of return on preference shares is 12%. If the dividend received annually is GH¢4.75, what is the price of the preference share?

Question 2

1. A preference share sells for GH¢25 and pays dividend of GH¢2.50. What is the share’s required rate of return?

2. You are a common stockholder of MD company limited. You are paid dividend of GH¢6.00 every year and the price of MD company stocks is GH¢150. If the required rate of return is 14%, what is the value of the stock?

Question 3

1. Given the following data, calculate of price of the common stock.

Required return 10%

Dividend GH¢1.00

Growth rate 5%

2. If the growth rate increases to 6% and the dividend remain GH¢1.00. What should be the price of the stock?

(b ii) If the required return declines to 9% and the dividend remain GH¢1.00, what should be the stock price?

Question 4

The expected dividend per share on the equity share is GH¢4.00. The dividend per share has grown over the past 10 years at the rate of 3% per year. What is the value of the equity share if the required rate is 12%?

Answer 1

Question 1

a. The limited liability for a shareholder in a company means, the shareholder is liable for the company's debt only upto the amount invested in the company and the shareholder's personal assets will never be liable for the debt of the company. For example, X a shareholder invested $100000 in ABC INC. If that company had a debt of $10000000 the shareholder X will only be liable to $100000 which he invested in the company and he will never be liable for any other debt in the company. But he lose the full amount he invested in that company.

b.  Value/price of the preferred stock = Dividend / Cost of capital

Price = 4.75 / .12

= $39.583

Question 2

a. Required rate of return = Dividend / Value of share

= 2.5 / 25

= 0.1 , 10%

b. Value of stock = Dividend / Required rate of return

= 6 / .14

= $42.857

Question 3

a. Price of common stock =( D₀ ( 1 + g )) / (K_s - g )

Where D₀ = Dividend per share in year 1

g = constant dividend growth rate

K_s = required rate of return on the common stock

Price = ( 1 ( 1 + 0.05 )) / ( .10 - 0.05 )

= 1.05 / .05

= $21

b. (i) Price of stock = ( 1 ( 1 + 0.06 )) / ( .10 - .06 )

= 1.06 / .04

= $26.5

(ii) Price of stock = ( 1 ( 1 + .05 )) / (.09 - .05)

= 1.05 / .04

= $26.25

Question 4

a. Price of stock = (D₀ (1+g)) / (k-g)

= ( 4 ( 1 + .03 )) / ( .12 - .03 )

= 4.12 / .09

=$45.77