A stock you are interested in paid a dividend of $1 last week.

The anticipated growth rate in dividends and earnings is 20%

for the next year and 10% the year after that before settling
down to a constant 5% growth rate. The discount rate is 12%.
Calculate the expected price of the stock.
Price = $1.00(1.20)/1.12 + $1.20(1.100)/1.2544 +
[$1.32(1.05)/(.12 - .05)]/1.2544 = $17.90
66. Majestic Homes' stock traditionally provides an 7% rate of
return. The company just paid a $2 a year dividend which is
expected to increase by 4% per year. If you are planning on
buying 1,000 shares of this stock next year, how much should
you expect to pay per share if the market rate of return for this
type of security is 8% at the time of your purchase?
Majestic Homes' stock traditionally provides an 7% rate of return.
The company just paid a $2 a year dividend which is expected to
increase by 4% per year. If you are planning on buying 1,000
shares of this stock next year, how much should you expect to pay
per share if the market rate of return for this type of security is
8% at the time of your purchase?
Wilbert's Clothing Stores just paid a $1.50 annual dividend. The
company has a policy whereby the dividend increases by 2.5%
annually. You would like to purchase 100 shares of stock in this
firm but realize that you will not have the funds to do so for
another three years. If you desire a 15% rate of return, how
much should you expect to pay for 100 shares when you can
afford to buy this stock? Ignore trading costs.
P3 = 1.5 * (1 + .025)^4/(.15 - .025) P3 = 13.25
Purchase cost = 100 * 13.25 = 1,325
The Bell Weather Co. is a new firm in a rapidly growing
industry. The company is planning on increasing its annual
dividend by 15% a year for the next four years and then
decreasing the growth rate to 5% per year. The company just
paid its annual dividend in the amount of $1.00 per share. What
is the current value of one share if the required rate of return is
10%?
Dividends for the first 4 years are: 1.15. 1.32, 1.52, and 1.75
P4 = 1.75 * (1 + .05)/(10% - 5%) = 36.75
P0 = 1.15/1.1 + 1.32/(1.1)^2 + 1.52/(1.1)^3 + 1.75/(1.1)^4 +
36.75/(1.1)^4 = 28.79
8. The underlying assumption of the dividend growth model
is that a stock is worth:

B. the present value of the future income which the stock

generates.
9. Assume that you are using the dividend growth model to
value stocks. If you expect the market rate of return to increase
across the board on all equity securities, then you should also
expect the:
C. market values of all stocks to decrease, all else constant.
16. The value of common stock today depends on:
C. the expected future dividends, capital gains and the discount
rate.
17. The closing price of a stock is quoted at 22.87, with a P/E of
26 and a net change of 1.42. Based on this information, which
one of the following statements is correct?
D. The earnings per share are equal to 1/26th of $22.87.
19. The discount rate in equity valuation is composed
entirely of:

B. the dividend yield and the growth rate.

58. Mortgage Instruments Inc. is expected to pay dividends of
$1.03 next year. The company just paid a dividend of $1. This
growth rate is expected to continue. How much should be paid
for Mortgage Instruments stock just after the dividend if the
appropriate discount rate is 5%.

E. $51.50
g = (D1 - D0)/D0 = ($1.03 - $1.00)/$1.00 = 0.03 (g = 3%)
Value of stock = D1/(r - g) = $1.03/(0.05 - 0.03) = $51.50
61. The Lory Company had net earnings of $127,000 this past
year. Dividends of $38,100 were paid. The company's equity
was $1,587,500. If Lory has 100,000 shares outstanding with a
current market price of $11.625 per share, and the growth rate
is 5.6%, what is the required rate of return?

A. 4.2%
B. 6%
C. 9%
D. 14%
E. None of these
R = Div/P0 + g = (.381(1.056))/11.625) + .056 = (.40/11.625) +
.056 = .0346 + .056 = .0906 = 9%
74. What are the components of the required rate of return on a
share of stock? Briefly explain each component.
The two components are dividend yield, which measures the
annual percentage income return on a stock, and the capital gains
yield, which is the percentage of price appreciation or
depreciation.
...
76. A number of publicly traded firms pay no dividends yet
investors are willing to buy shares in these firms. How is this
possible? Does this violate our basic principle of stock valuation?
Explain.
Our basic principle of stock valuation is that the value of a share
of stock is simply equal to the present value of all of the expected
dividends on the stock. According to the dividend growth model,
an asset that has no expected cash flows has a value of zero, so if
investors are willing to purchase shares of stock in firms that pay
no dividends, they evidently expect that the firms will begin
paying dividends at some point in the future.