Question

1.

The Bell Weather Co. is a new firm in a rapidly growing industry. The company is planning on increasing its annual dividend by 17 percent a year for the next 4 years and then decreasing the growth rate to 6 percent per year. The company just paid its annual dividend in the amount of $2.40 per share. What is the current value of one share of this stock if the required rate of return is 7.90 percent?

$199.31

$185.11

$253.30

$250.90

$196.91

2.

NU YU announced today that it will begin paying annual dividends. The first dividend will be paid next year in the amount of $0.43 a share. The following dividends will be $0.48, $0.63, and $0.93 a share annually for the following three years, respectively. After that, dividends are projected to increase by 3.1 percent per year. How much are you willing to pay today to buy one share of this stock if your desired rate of return is 12 percent?

$2.16

$8.65

$10.77

$11.20

$11.11

3.

The Red Bud Co. pays a constant dividend of $2.20 a share. The company announced today that it will continue to do this for another 2 years after which time they will discontinue paying dividends permanently. What is one share of this stock worth today if the required rate of return is 7.8 percent?

$4.40

$2.46

$6.13

$3.93

$2.37

Answer 1

1)

Year 1 dividend = 2.4 ( 1.17) = 2.808

Year 2 dividend = 2.808 ( 1.17) = 3.28536

year 3 dividend = 3.28536 ( 1.17) = 3.843871

Years 4 dividend = 3.843871 ( 1.17) = 4.497329

Since from year 4 the growth rate will be 6% per year and required rate of return is 7.9%

Present value at year 3 = 4.497329 / 0.079 - 0.06

Present value at year 3 = 236.701526

Present value = 236.701526 / ( 1 + 0.079)³

Present value = 188.424219

Present value of year 3 dividend = 3.843871 / ( 1 + 0.079)³

Present value of year 3 dividend = 3.059881

Present value of year 2 dividend = 3.28536/ ( 1 + 0.079)²

Present value of year 2 dividend = 2.82189

Present value of year 1 dividend = 2.808 / ( 1 + 0.079)

Present value of year 1 dividend = 2.60241

Total present value = 2.60241 + 2.82189 + 3.059881 + 188.424219

Present value = $196.91

2)

Present value of year 4 dividend at year 3 = 0.93 / 0.12 - 0.031

Present value of year 4 dividend at year 3 = 10.449438

Present value = 10.449438 / ( 1 + 0.12)³

Present value = 7.437704

Present value of year 3 dividend = 0.63 / ( 1.12)³ = 0.448422

Present value of year 2 dividend = 0.48 / ( 1.12)² = 0.382653

Present value of year 1 dividend = 0.43 / ( 1.12)¹ = 0.383929

Total present value = 0.448422 + 0.382653 + 0.383929 + 7.437704

Prsent value = $8.65

3)

Present value of year 1 dividend = 2.2 / ( 1 + 0.078) = 2.040816

Present value of year 2 dividend = 2.2 / ( 1 + 0.078)² = 1.893151

Present value = 2.040816 + 1.893151

Present value = $3.93