Question

Please answer the following questions!

Wonder Trees Inc. expects to pay the next dividend payment of $4.5 per share (D₁). The company is expected to maintain a 6 percent growth rate forever. If the company stock currently sells for $41 per share, the required return should be ______ percent. Express in percentage without the % sign, and round it to two decimal places, e.g., 13.45.

Rascal, Inc., has an issue of preferred stock outstanding that pays a $8.9 dividend every year in perpetuity. If this issue currently sellsfor $87.59 per share, the required return is      ___________ percent. Express in percentage without the % sign, and round it to two decimal places, e.g., 13.45.

CSU Co. just paid a dividend of $2.0 per share on its stock. The dividends are expected to grow at a constant rate of 2 percent per year indefinitely. If investors require an 9.5 percent return on Sky High Co. stock, the current price is $ _________ . Round it to two decimal places, and do not include the $ sign, e.g., 23.56.

Nuclear Inc. just paid a $1.25 dividend. Dividends are expected to grow by 35% in year 1, by 27% in year 2, and by 18% in year 3. After this, dividends are expected to grow at constant rate of 5% per year. If the required return for this stock is 11%, how much should the stock sell for today?

Thank you!!

Answer 1

a) Calculation of required return:
D1= $4.5
Growth= 6%
Price= $41
Price= D1/(required return-growth)
41=4.5/(required return-0.06)
required return-0.06= 0.1098
Required return=0.1698
Required return is 16.98
b) Calculation of cost of preferred stock
D1= $8.9
Price= $87.59
Required return= D1/Price
= 8.9/87.59=0.1016
Preferred stock's required rate of return is 10.16
c) Calculation of current price
D0= $2
D1= D0*(1+groth)= 2*(1+0.02)=2.04
Growth= 2%
Required return= 9.5%
Price= D1/(required return-growth)
= 2.04/(0.095-0.02)=$27.20
Current price is $27.20
d) Calculation of current price:
Year	Cashflows	PVF @11%	Present value
1	1.69	0.901	1.52
2	2.14	0.812	1.74
3	2.53	0.731	1.85
3	44.26	0.731	32.35
Total			37.46
Current price is $37.46
Working:
Dividend at year 1= 1.25*(1+0.35)= $1.69
Dividend at year 2= 1.69*(1+0.27)= $2.14
Dividend at year 3=2.14*(1+0.18)= $2.53
Terminal value= Dividend(1+growth)/(return-growth)
=2.53*(1+0.05)/(0.11-0.05)= 44.26