Question

6. Suppose a firm just paid a dividend of $1.60. They have announced plans to pay dividends of $1.80, $2.00, and $2.20 over the next three years. Following that, they will maintain a 3% growth rate beyond that period. The required rate of return is 10%. Given all of this, what is the current calculated stock price?
a. $29.26 b. $27.61 c. $26.18 d. $24.88

8. Consider a project with the following net cash flows: NINV: $700,000; Year 1: $500,000; Year 2: $300,000; Year 3: $200,000; and Year 4: $100,000. The project’s required return is 8%. Given this, what is the discounted payback period?
a. 1.92 years
b. 1.66 years
c. 2.10 years
d. 3.09 years

10. A standard share of preferred stock pays an annual dividend of $3. The current price of the share of preferred stock is $60. Given this, what is the required return on the preferred stock?
a. 4% b. 6% c. 5% d. 7%

Answer 1

ans 6
	we have to use dividend discount model to compute the terminal value
	Price today is the present value of future cash flow
	i	ii	iii=i+ii	iv	v	vi=iv*v
	year	Dividend	Terminal value	total cash flow	PVIF @ 10%	present value
	1	1.8000		1.80	0.9091	1.64
	2	2.0000		2.00	0.8264	1.65
	3	2.2000	32.37	34.57	0.7513	25.97
	Price =					29.26
	Terminal value = Divided in year 4/(required rate - growth rate)
			2.2*103%/(10%-3%)
			$   32.37
	Price today = option a)				$   29.26
ans 7
	Year	Cash flow	PVIF @8%	present value	cumulative present value
	0	(700,000)	1	(700,000)	(700,000)
	1	500,000	0.925926	462,963	(237,037)
	2	300,000	0.857339	257,202	20,165
	3	200,000	0.793832	158,766	178,931
	Discounted payback period =	1.92	year
	1+237037/257202
	answer is option a)	1.92	year
ans 8
	required rate on preferred dividend =
	annual dividend/Price today =
	3/60		5.00%
	answer is option c_	5.00%