Question

1) ExFed paid its annual dividend this year of $1.62 a share. The firm recently announced that all future dividends will be increased by 1.1 percent annually. What is one share of this stock worth to you if you require a rate of return of 15.7 percent? A) $12.34 B) $11.16 C) $13.77 D) $11.33 E) $11.95

2) Braxton's Cleaning Company stock is selling for $32.60 a share based on a rate of return of 13.8 percent. What is the amount of current dividend if the dividends are increasing by 2.4 percent annually? A) $3.63 B) $2.72 C) $3.78 D) $2.86 E) $3.14

3) The common stock of Up-Towne Movers sells for $33 a share, has a rate of return of 11.4 percent, and a dividend growth rate of 2 percent annually. What was the amount of next year annual dividend? A) $3.10 B) $2.14 C) $3.48 D) $2.22 E) $3.94

4) Dry Dock Marina is expected to pay an annual dividend of $1.58 next year. The stock is selling for $28.53 a share and has a total return of 9.48 percent. What is the dividend growth rate? A) 2.67 percent B) 3.88 percent C) 2.57 percent D) 2.28 percent E) 3.94 percent

5) Lamey Gardens has a dividend growth rate of 5.6 percent, a market price of $23.16 a share, and a required return of 14 percent. What is the amount of the last dividend this company paid? A) $1.58 B) $2.54 C) $1.84 D) $2.31 E) $1.79 Please scroll to the next page

Answer 1

The following is the Dividend Growth Model:

1) Given:

• D0 = $1.62
• g = 1.1%
• r = 15.7%
• P = ?

Putting the values in the formula:

• P = ($1.62 * (1+1.1%)) / (15.7%-1.1%) = $11.16
• Correct option is B) $11.16

2) Given:

• P = $32.60
• g = 2.4%
• r = 13.8%
• D = ?

Putting the values in the formula, we get:

• D = P * (r-g)/(1+g) = $32.6 * (13.8%-2.4%) / (1+2.4%) = $3.63
• Correct option is A) $3.63

3) Given:

• P = $33
• g = 2%
• r = 11.4%
• D*(1+g)= ? {next years dividend}

Putting the values in the formula, we get:

• D*(1+g) = P * (r-g) = $33 * (11.4%-2%) = $3.102
• Correct option is A) $3.10

4) Given:

• D*(1+g) = $1.58 {next years dividend}
• P = $28.53
• r = 9.48%
• g = ?

Putting the values in the formula, we get:

• g = r - (D(1+g)/P) = 9.48% - ($1.58/$28.53) = 3.94%
• Correct option is E) 3.94 percent

5) Given:

• P = $23.16
• g = 5.6%
• r = 14%
• D = ?

Putting the values in the formula, we get:

• D = P * (r-g)/(1+g) = $23.16 * (14% - 5.6%) / (1+5.6%) = $1.84
• Correct option is C) $1.84