Question

1. Tresnan Brothers is expected to pay a $3.50 per share dividend at the end of the year (i.e., D₁ = $3.50). The dividend is expected to grow at a constant rate of 10% a year. The required rate of return on the stock, r_s, is 20%. What is the stock's current value per share? Round your answer to two decimal places.

$  

____________

2. Holtzman Clothiers's stock currently sells for $20.00 a share. It just paid a dividend of $3.50 a share (i.e., D₀ = $3.50). The dividend is expected to grow at a constant rate of 10% a year.

a. What stock price is expected 1 year from now? Round your answer to two decimal places.
$  

b. What is the required rate of return? Do not round intermediate calculations. Round your answer to two decimal places.
  %

___________

3.

Farley Inc. has perpetual preferred stock outstanding that sells for $36 a share and pays a dividend of $5.00 at the end of each year. What is the required rate of return? Round your answer to two decimal places.

  %

Answer 1

1.Current price=D1/(Required return-Growth rate)

=3.5/(0.2-0.1)

=$35

2.a.Expected price=Current price*(1+Growth rate)

=20*1.1

=$22

Required return=(D1/Current price)+Growth rate

=[(3.5*1.1)/20]+0.1

=29.25%

3.Required rate of return=Annual dividend/Current value

=5/36

=13.89%(Approx)