Question

PLEASE ANSWER ALL, if you are not going to answer all, DO NOT answer at all ! thank you !!

2.Gary King is interested in buying the stock of First National Bank. While the bank's management expects no growth in the near future, Gary is attracted by the dividend income. Last year the bank paid a dividend of $7.20. If Gary requires a return of 12.5 percent on such stocks, what is the maximum price he should be willing to pay for a share of the bank’s stock?

-Maximum price:

3. you own shares of Sunland DVD Company and are interested in selling them. With so many people downloading music these days, sales, profits, and dividends at Sunland have been declining 8 percent per year. The firm just paid a dividend of $2.20 per share. The required rate of return for a stock this risky is 14 percent. If dividends are expected to decline at 8 percent per year, what is a share of the stock worth today?

-what is a share of the stock worth today?

4. Oriole Corp. will pay dividends of $5.00, $6.25, $4.75, and $3.00 in the next four years. Thereafter, management expects the dividend growth rate to be constant at 8 percent. If the required rate of return is 17.50 percent, what is the current value of the stock?

-current value of the stock?

Answer 1

2.Value of Share = Expected Dividend/(Required Rate of Return – Growth Rate)

= 7.20/(12.5%-0%)

= $57.6

Hence, maximum price = $57.6

3.Value of Stock = 2.20(1-8%)/(14%+8%)

= 9.2

Hence, value of Stock = $9.2

4.Current value of stock is equal to the present value of all future dividends

= 5/(1.1750) + 6.25/(1.1750)² + 4.75/(1.1750)³ + 3/(1.1750)⁴ + 3(1.08)/(17.50%-8%)(1.1750)⁴

= $4.2553 + 4.5269 + 2.9281 + 1.5738 + 17.8924

= $31.18

Hence, the current value of stock = $31.18