Question

13) The next dividend payment by HM Enterprises will be $1.82 per share with future increases of 2.8 percent annually. The stock currently sells for $38.70 per share. What is the dividend yield?

14) Unilever will pay an annual dividend of $3.26 a share next year with future dividends increasing by 2.8 percent annually. What is the market rate of return if the stock is currently selling for $49.10 a share?

Would you buy this stock if your current portfolio average return is 8%? Explain

15) Foundation Motors is expected to pay an annual dividend next year of $3.10 a share. Dividends are expected to increase by 1.85 percent annually. What is one share of this stock worth at a required rate of return of 15 percent?

Would you buy the stock for $22/share? Explain.

16) Four Corners Markets paid an annual dividend of $1.42 a share last month. Today, the company announced that future dividends will be increasing by 1.3 percent annually. If you require a return of 14.6 percent, how much are you willing to pay to purchase one share of this stock today?

Would you buy the stock for $11/share? Explain.

Answer #1

13). Dividend Yield = Annual Dividend / P0 = $1.82 / $38.70 = 0.0470, or 4.70%

14). r = [D1 / P0] + g

= [$3.26 / $49.10] + 0.028

= 0.0664 + 0.028 = 0.0944, or 9.44%

15). P0 = D1 / (r - g)

= $3.10 / (0.15 - 0.0185)= $3.10 / 0.1315 = $23.57

Yes, we would buy the stock for $22, as the market price is less than the fair price.

16). P0 = [D0 x (1 + g)] / (r - g)

= [$1.42 x 1.013] / [0.146 - 0.013] = $1.43846 / 0.133 = $10.82

No, we wouldn't buy the stock for $11, as the market price is more than the fair price.

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