Question

# Q1/Character Co. offers a common stock that pays an annual dividend of \$3.36 a share. The...

Q1/Character Co. offers a common stock that pays an annual dividend of \$3.36 a share. The company has promised to maintain a constant dividend. How much are you willing to pay for one share of this stock if you want to earn a 7.82 percent return on your equity investments?

Q2/The Onboard Co. is a new firm in a rapidly growing industry. The company is planning on increasing its annual dividend by 23.3 percent a year for the next 3 years and then decreasing the growth rate to 3.1 percent per year. The company just paid its annual dividend in the amount of \$2.51 per share. What is the current value of one share of this stock if the required rate of return is 9 percent?

Q3/Orca, Inc. announced today that it will begin paying annual dividends. The first dividend will be paid next year in the amount of \$1.94 a share. The following dividends will be \$1.15, \$1.57, and \$2.13 a share annually for the following three years, respectively. After that, dividends are projected to increase by 3 percent per year. How much are you willing to pay today to buy one share of this stock if your required rate of return is 13.5 percent?

1. Present value of a constant dividend paying stock = Dividend/rate

PV = 3.36/0.0782 = \$42.97

2.

D0 = 2.51

D1 = 2.51*(1+0.233) = 3.095

D2 = 3.095*(1+0.233) = 3.816

D3 = 3.816*(1+0.233) = 4.705

D4 = 4.705*(1+0.031) = 4.851

P3 = D4/(R-g) = 4.851/(0.09-0.031) = 82.22

P0 = 3.095/(1+0.09)^1 + 3.816/(1+0.09)^2 + 4.705/(1+0.09)^3 + 82.22/(1+0.09)^3 = \$73.17

3.

D1 = 1.94

D2 = 1.15

D3 = 1.57

D4 = 2.13

D5 = 2.13*(1+0.03) = 2.194

P4 = D5/(R-g) = 2.194/(0.135-0.03) = 20.8943

P0 = 1.94/(1+0.09)^1 + 1.15/(1+0.09)^2 + 1.57/(1+0.09)^3 + 2.13/(1+0.09)^4 + 20.8943/(1+0.09)^4 = \$20.27

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