Question

WEEK 5 HW CORP FIN 3

SHOW YOUR CALCULATIONS FOR #13-#20.

You have the option of performing calculations manually or with the use a financial calculator or spreadsheet. Either way, you must specify what is being calculated to earn credit:

13. Lion Equity paid an annual dividend of $3.25 per share last month, and it is anticipated that future dividends will increase by 4% annually. As a shareholder, if you require a 12% return on your investment in Lion Equity, how much are you willing pay to purchase one share of stock in Lion Equity today?

14. Charming Shoppes will pay an annual dividend of $2.55 next year with future dividends increasing by 4% annually. If the market rate of return on this stock is 12.5%, what should the stock be currently selling for?

15. The Clark Group pays an annual dividend of $5.80 per share. The economy is tough but Clark promises to continue maintaining this level of dividend every year for the time being. How much are you willing to pay for one share of this stock is you want to earn a 14.5% annual return?

16. Miller Cooper just paid a $4.25 annual dividend with the stated intention of increasing its dividend by 3% annually. You would like to purchase stock in this firm but realize that you will not have the funds to do so for another 4 years. If you require a 15% rate of return, how much will you be willing to pay per share for the stock when you can afford to make this investment?

17. Enrite Gas recently paid a $4.75 annual dividend on its common stock, which is expected to increase at an average rate of 3.5% per year. If the stock is currently trading for $39.33 per share, what is its market rate of return?

18. Town Bagel common stock sells for $65 a share and pays an annual dividend that increases by 4% annually. The market rate of return on this stock is 14%. What is the amount of the last dividend paid?

19. Erie Health Care common stock offers an expected total return of 9.5%. The last annual dividend was $2.10 a share and dividends are expected to increase at a constant 3% percent per year. What is the dividend yield?

20. The preferred stock of AKA Enterprises pays an annual dividend of $8.50 and sells for $55.74 a share. What is the rate of return on this security?

NO SCREEN SHOTS OR IMAGES OF RESPONSE. PLEASE TYPE YOUR ANSWER OR UPLOAD DOCUMENT IF REQUIREMENTS MENTIONED ABOVE ARE NOT MET I WILL GIVE A NEGATIVE RATING

Answer 1

13) This can be solved using formula of growing perpetuity formula

PV of growing perpetuity = D1/r-g

D1 = Dividend of year 1 = D0(1+g) = 3.25(1.04) = 3.38$

r =12%

g = 4%

Value to be paid for acquireing share = 3.38/12%-4%

=3.38/8%

=84.5$

14) This can be solved using formula of growing perpetuity formula

PV of growing perpetuity = D1/r-g

D1 =2.55$

r =12.5%

g = 4%

Current market price = 2.55/12.5%-4%

=2.55/8.5%

=30$

15) This can be solved by using perpetuity formula

PV = A/r

A= Annuity =5.8$

r = Required rate = 14.5%

Price to be paid for acqiring share = 5.8/14.5%

=40$

16)

This can be solved using formula of growing perpetuity formula

PV of growing perpetuity = D5/r-g

D5 = D0(1+g)^5 = (4.25)(1.03)^5 = 4.9269$

r =14%

g = 3%

Price willing to pay = 4.9269/14%-3%

=4.9269/11%

=44.79$