1 STOCK VALUATION 1. If current price of stock is $25 and you hold it for one year and received dividend of $2.5. You sold it at $27. How much return you received? Show dividend yield and capital gain separately. 2. If investor required return is 20% and capital gain is 8% how much dividend company should pay? 3. Current price of stock is $20 and expected price after one year is 22.5. If investor required return is 18%. What percentage of dividend should company pay? 4. You own a stock that will start paying $0.50 annually at the end of the year. It has zero growth in future. If the required rate of return is 14%, what should you pay per share? 5. You own a stock that will start paying $0.50 annually at the end of the year. It will then grow each year at a constant annual rate of 5%. If the required rate of return is 14%, what should you pay per share? 6. What should you pay for a stock assuming you expect the following: a dividend of $1.00 paid at the end of years 1 and 2; cost of equity equal to 8 percent; and, a selling price of $31 at the end of two years? 7. Assume that IBM is expected to pay a total cash dividend of $5.60 next year and that dividends are expected to grow at a rate of 5% per year forever. Assuming annual dividend payments, what is the current market value of a share of IBM stock if the required return on IBM common stock is 10%? 8. Consider the following for a firm. Its stock price (P0) is at $50, its payout ratio (POR) is 0.4, its EPS1 is $2.00, and investor required return is 10%. What is its required rate of return on equity? 9. You own a stock that is currently selling for $50. You expect a dividend of $1.50 next year and you require a 12% rate of return.. What is the dividend growth rate for your stock assuming constant growth? 10. What would you pay for a stock expected to pay a $2.50 dividend in one year if the expected dividend growth rate is zero and you require a 10% return on your investment? 11. Consider the following for a firm. Its stock price (P0) is at $50, its payout ratio (POR) is 0.4, its EPS1 is $2.00, and investor required return is 10%. What is its dividend yield? 12. Consider the following for a firm. Its stock price (P0) is at $50, its payout ratio (POR) is 0.4, its EPS1 is $2.00, and investor required return is 10%.. What is the percent of capital gains? 2 13. What would you pay for a stock expected to pay a $2.25 dividend in one year if the expected dividend growth rate is 3% and you require a 12% return on your investment? 14. You are considering investing in ICI. Suppose ICI currently paid $3 dividend and enjoying super growth and expected to pay 30% more in dividends each year for 3 years. After these three years the dividend growth rate is expected to be 2% per year forever. If the required return for ICI common stock is 11%, what is a share worth today? 15. You are considering investing in ICI. Suppose ICI is currently undergoing expansion and is not expected to change its cash dividend while expanding for the next 4 years. This means that its current annual $3.00 dividend will remain for the next 4 years. After the expansion is completed, higher earnings are expected to result causing a 30% increase in dividends each year for 3 years. After these three years of 30% growth, the dividend growth rate is expected to be 2% per year forever. If the required return for ICI common stock is 11%, what is a share worth today? 16. You have 500 shares of Royal Oil. Royal is expected to pay a dividend next year of $2.38. The expected dividend growth rate is 6% per year forever. Another of your friend has 600 shares of Light House. It has an expected growth rate in dividends of 4% per year forever. It sells for $51.875. It is expected to pay a dividend of $3.35 per share next year. Answer the below questions. (1) If Royal is selling for $29.45 per share, what is your expected return on Royal Oil? (2) What is your friend expected return on Light House?
