Question

Thank You

1)

Financial Technology Corp. is expected to pay a dividend of $3 today but dividends are expected to grow at 5% per year going forward. The required return is 7%. What is the price expected to be in year 3?

$182.33

$173.64

$185.55

$165.38

None of the above.

2)

River Falls Co. is expected to pay a dividend of $1.50 per share one year from now. After that, the dividend is expected to grow at a constant rate of 5% per year in the future. The company's beta is 1.2, the market risk premium is 5.5%, and the risk-free rate is 3%. What is the company's current stock price?

$42.86

$34.24

$45.00

$32.61

None of the above.

Answer 1

The price is computed as shown below:

= Dividend in year 4 / (required rate of return - growth rate)

= ($ 3 x 1.05⁴ ) / (0.07 - 0.05)

= $ 182.33 Approximately

The current stock price is computed as shown below:

= Dividend in year 1 / (required rate of return - growth rate)

required rate of return is computed as follows:

= risk free rate + beta x market risk premium

= 3% + 1.2 x 5.5%

= 9.6% or 0.096

So, the price of the stock will be as follows:

= $ 1.50 / (0.096 - 0.05)

= $ 32.61 Approximately

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