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7. Hardware Co. paid an annual dividend of $0.95 today. The company announced that future dividends...

7. Hardware Co. paid an annual dividend of $0.95 today. The company announced that future dividends will grow at 2.6% annually. If you require a 13% rate of return, how much are you willing to pay to purchase one share of stock today?


A. $9.13 B. $9.37 C. $9.67 D. $9.72 E. $9.88

8. WinForever Corporation has a dividend-paying stock with a total return for the year of -6.5%. Which of the following must be true?


A. The dividend must be constant B. The stock has a negative capital gains yield C. The dividend yield must be zero D. The required rate of return for this stock increased over the year E. The firm is experiencing supernormal growth

Solutions

Expert Solution

7.

Compute the next expected dividend, using the equation as shown below:

Next dividend = Current dividend*(1 + Growth rate)

                       = $0.95*(1 + 0.026)

                        = $0.9747

Hence, the next expected dividend is $0.9747.

Compute the current stock price, using the equation as shown below:

Current price = Next dividend/ (Required rate – Growth rate)

                      = $0.9747/ (13% - 2.6%)

                      = $0.9747/ 10.4%

                      = $9.37211538461

Hence, the current stock price is $9.37.

jeff jeffy answered 2 years ago
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