Question

Zena Corp just paid investors a dividend of $1.25. This growing company expects dividends to grow at 8% for the next three years. After year 3, dividends are expected to grow constantly at 2% per year. Investors require a 7% return on Zena Corp stock. What is the current value of Zena Corp stock?

1-$30.04    2-$28.51 3-$25.00 4-$26.22

Filmore Incorporated anticipates its revenues and common stock dividends will remain flat forever. It currently pays an annual dividend of $20 per year. If it pays the next dividend exactly one year from today, then what is the price of Filmore's common shares if the required rate of return is 12%?

		$200.00
		$24.00
		$40.00
		$166.67

Volkswagon was found guilty of falsifying emission records. This fact had an adverse effect on the market price of Vokswagon stock. This is an example of:

		Systematic risk
		Default risk
		Unsystematic risk
		Standard deviation

The income stream for common stock is

1-dividends 2-interest 3-market capitalization 4-equity

The income stream for common stock is

		interest
		market capitalization
		equity
		dividends

Answer 1

Value of Zena Corp stock P0)= (D1/(1+r))+(D2/(1+r)^2)+(D3/(1+r)^3)+[D4/(r-g)]/(1+r)^3

r, required return =7%

long term growth rate,g=2%

D1=1.25*(1+8%)=1.35

D2=(1.35)*(1+8%)=1.458

D3=(1.458)*(1+8%)=1.5746

D4=(1.5746)*(1+2%)=1.6061

P0=(1.35/1.07)+(1.458/(1.07)^2)+(1.5746/(1.07)^3)+(1.6061/(7%-2%))/(1.07)^3

P0=30.04

Option 1 is correct

2. growth rate=0%

Hence, Price P0=D1/(r-g)=20/(12%-0%)=166.67

Option D is correct

3. It is unsystematic risk becuase company has falsified the emission records which is particular to Volkswagon. This will not have any impact on the industry as a whole.

Default risk is the risk of paying debt obliagtions to lenders and payments to vendors/suppliers

Standard deviation is the risk that is variant from the mean

4. The income stream from the stock holders are the dividends paid by the company.