Question

4. Burnett Corp. pays a constant $29 dividend on its stock. The company will maintain this dividend for the next 15 years and will then cease paying dividends forever.

If the required return on this stock is 14 percent, what is the current share price?

$203.06

$187.03

$178.12

$174.56

$435.00

11. CDB stock is currently priced at $77. The company will pay a dividend of $5.37 next year and investors require a return of 11.8 percent on similar stocks. What is the dividend growth rate on this stock?

6.97%

6.10%

4.58%

4.83%

4.50%

15. Santa Klaus Toys just paid a dividend of $3.30 per share. The required return is 9.6 percent and the perpetual dividend growth rate is 4.2 percent. What price should this stock sell for five years from today?

$61.11

$81.51

$72.04

$75.07

$78.22

Answer 1

a.Current price=29*Present value of annuity factor(14%,15 years)

Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate

=29[1-(1.14)^-15]/0.14

=29*6.14216799

=$178.12(Approx)

b.Required return=(D1/Current price)+Growth rate

0.118=(5.37/77)+Growth rate

Growth rate=0.118-(5.37/77)

=4.83%(Approx)

c.Current price=D1/(Required return-Growth rate)

=(3.3*1.042)/(0.096-0.042)

=63.6778

P5=Current price*(1+Growth rate)^5

=63.6778*(1.042)^5

=$78.22(Approx)