Question

1. Medical Corporation of America (MCA) has a current stock price of \$35, and its last...

1. Medical Corporation of America (MCA) has a current stock price of \$35, and its last dividend (D0) was \$2.50. In view of MCA’s strong financial position, its required rate of return is 12%. If MCA’s dividends are expected to grow at a constant rate in the future, what is the firm’s expected stock price in five years?

Choice: \$43.68 Choice: \$48.95 Choice: \$52.10 Choice: \$68.75

2. A broker offers to sell you shares of Bay Area Healthcare, which just paid a dividend of \$2 per share. The dividend is expected to grow at a constant rate of 6% per year. The stock’s required rate of return is 12%. What is the expected dollar dividend at the end of three years?

Choice: \$2.38 Choice: \$3.12 Choice: \$5.00 Choice: 12%

3. A broker offers to sell you shares of Bay Area Healthcare, which just paid a dividend of \$2.50 per share. The dividend is expected to grow at a constant rate of 5% per year. The stock’s required rate of return is 12%. What would be a price for this stock?

Choice: \$32.25 Choice: \$37.50 Choice: \$43.10 Choice: \$45.65

1)

 Stock price in 5 years (P5) D6÷(r-g) Here, Expected dividend (D6) \$                      3.26 =2.5*(1+4.53%)^6 Required return ( r) 12.00% Growth rate (g) 4.53% =(35*12%-2.5)/(35+2.5) Stock price in 5 years (P5) \$            43.68 3.26/(12%-4.53%)

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