Question

# 16. The Row Boat has paid annual dividends of \$.48, \$0.60, and \$0.62 a share over...

16. The Row Boat has paid annual dividends of \$.48, \$0.60, and \$0.62 a share over the past three years, respectively. The company now predicts that it will maintain a constant dividend since its business has leveled off and sales are expected to remain relatively constant. Given the lack of future growth, you will only buy this stock if you can earn at least a 14 percent rate of return. What is the maximum amount you are willing to pay for one share of this stock today?
A. \$3.43
B. \$4.43
C. \$5.05
D, \$5.60

18. The current yield on Martin's Mills common stock is 3.6 percent. The company just paid a \$1.80 dividend and plans to pay \$1.86 next year. The dividend growth rate is expected to remain constant at the current level. What is the required rate of return on this stock?
A. 3.72 percent
B. 4.08 percent
C. 5.69 percent
D.7.05 percent

17. The common stock of BJ's Auto Clinic sells for \$38.25 a share. The stock is expected to pay \$1.90 per share next month when the annual dividend is distributed. BJ's has established a pattern of increasing their dividends by 2.5 percent annually and expects to continue doing so. What is the market rate of return on this stock?
A. 4.41 percent
B. 4.97 percent
C. 7.38 percent
D. 7.59 percent

Please help me answer all questions

#### Homework Answers

Answer #1

1.
The maximum amount you are willing to pay for one share of this stock today = D1 / (r - g)
= \$0.62 / (0.14 - 0)
= \$0.62 / 0.14
= \$4.43

The maximum amount you are willing to pay for one share of this stock today = \$4.43

2.
P0 = D0 / current yield = \$1.80 / 3.6% = \$50

Growth rate = (\$1.86 - \$1.80) / \$1.80 = 3.33%

Required return = (D1 / P0) + g
= (\$1.86 / \$50) + 3.33%
= 3.72% + 3.33%
= 7.05%

Require rate of return = 7.05%

3.
Market rate of return = (D1 / P0) + g
= (\$1.90 / \$38.25) + 2.5%
= 4.97% + 2.5%
= 7.47%

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