Question

PLEASE SOLVE THE NEXT 3 PROBLEMS WITH CALCULATION

1. Jim owns shares of Abco, Inc. preferred stock which he says provides him with a constant 6.58 percent rate of return. The stock is currently priced at $45.60 a share. What is the amount of the dividend per share? Round to the nearest cent. Do not include the dollar sign in your answer. (i.e. If your answer were $1.23, then type 1.23 without a $ sign)

2. A firm is planning to pay a dividend of $1.50 in a year. The growth rate of dividend is expected to be 4% a year and the required rate of return is 9%. What is the value of this stock? Round to the nearest cent. Do not include the dollar sign in your answer. (i.e. If your answer were $1.23, then type 1.23 without a $ sign)

3. The price of NetFlex stock is $54.54; its expected dividend next year is $6, and its constant annual growth rate thereafter is 5%. What is the required rate of return on the stock? Answer in percent format. Round to the nearest hundredth percent. Do not include the percent sign in your answer. (i.e. If your answer were 1.23%, then type 1.23 without a % sign)

Answer 1

Answer to Question 1:

Dividend Rate = 6.58%
Current Price = $45.60

Dividend per share = Dividend Rate * Current Price
Dividend per share = 6.58% * $45.60
Dividend per share = $3.00

Answer to Question 2:

Expected Dividend = $1.50
Growth Rate = 4%
Required Return = 9%

Price per share = Expected Dividend / (Required Return - Growth Rate)
Price per share = $1.50 / (0.09 - 0.04)
Price per share = $30.00

Answer to Question 3:

Expected Dividend = $6.00
Current Price = $54.54
Growth Rate = 5%

Required Return = Expected Dividend / Current Price + Growth Rate
Required Return = $6.00 / $54.54 + 0.05
Required Return = 0.1600 or 16.00%