Chapter 8
Additional Problems
1- Garage Inc., is expected to maintain a constant 6% growth rate in its dividends,
indefinitely. If the company has a dividend yield of 5.4%, what is the required
rate of return on the company’s stock? (11.4%)
2- DMX Corp. pays a constant $10 dividend on its stock. The company will
maintain this dividend for the next seven years and will then cease paying
dividends forever. If the required return on this stock is 11%, what is the current
share price? ($47.12)
3- Tool Inc. has an issue of preferred stock outstanding that pays a $6 dividend every
year, in perpetuity. If this issue currently sells for $80.86 per share, what is the
required return? (7.42%)
4- After successfully completing your MGT 3040 class, you feel that the next
challenge ahead is to serve on the board of directors of McAlexander Enterprises.
Unfortunately you will be the only individual voting for you. If McAlexander has
200,000 shares outstanding and the stock currently sells for $65, how much will it
cost you to buy a seat if the company uses straight voting? Assume that
McAlexander uses cumulative voting and there are four seats in the current
election; how much will it cost you to buy a seat now? ($6,500,065 and
$3,250,065)
5- The stock price of Aenima Co. is $80. Investors require a 13% rate of return on
similar stock. If the company plans to pay a dividend of $4.20 next year, what
growth rate is expected for the company’s stock price? (7.75%)
6- Bifocals Inc., has a new issue of preferred stock it calls 20/20 preferred. The
stock will pay a $20 dividend per year, but the first dividend will not be paid for
20 years. If you require an 8% return on this stock, how much should you pay
today? ($57.93)
7- Metallica Bearings Inc., is a young start up company. No dividends will be paid
on the stock over the next six years, because the firm needs to plow back its
earnings to fuel growth. The company will then pay a $9 per share dividends in
year 7 and will increase the dividend by 5% per year thereafter. If the required
return on this stock is 15%, what is the current share price? ($38.91)
8- Kaci Corporation is expected to pay the following dividends over the next four
years: $10, $15, $7, and $3. Afterwards, the company pledges to maintain a
constant 5% growth rate in dividends, forever. If the required return on the stock
is 13%, what is the current share price? ($51.44)
9- Tubby Corporation stock currently sells for $72 per share. The market requires a
14% return on the firm’s stock. If the company maintains a constant 6% growth
rate in dividends, what was the most recent dividend per share paid on the stock?
($5.44)