Practice Problems Chapter 8 PDF

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Chapter 8 Practice Problems 1) NU YU announced today that it will begin paying annual dividends. The first dividend will be paid next year in the amount of $.37 a share. The following dividends will be $.42, $.57, and $.87 a share annually for the following three years, respectively. After that, dividends are projected to increase by 2.8 percent per year. How much are you willing to pay today to buy one share of this stock if your desired rate of return is 9 percent? A) $14.83

B) $2.99

C) $11.97

D) $14.80

E) $14.43

2) Michael's, Incorporated, just paid $2.55 to its shareholders as the annual dividend. Simultaneously, the company announced that future dividends will be increasing by 5.5 percent. If you require a rate of return of 9.7 percent, how much are you willing to pay today to purchase one share of the company's stock? A) $64.05

B) $32.03

C) $17.70

D) $66.60

E) $27.73

3) Asonia Company will pay a dividend of $4.10, $8.20, $11.05, and $12.80 per share for each of the next four years, respectively. The company will then close its doors. If investors require a return of9.3 percent on the company's stock, what is the stock price? A) $32.58

B) $28.05

C) $38.92

D) $30.25

E) $34.10

4) The Bell Weather Company is a new firm in a rapidly growing industry. The company is planning on increasing its annual dividend by 20 percent a year for the next 4 years and then decreasing the growth rate to 3 percent per year. The company just paid its annual dividend in the amount of $3.40 per share. What is the current value of one share of this stock if the required rate of return is 8.90 percent? A) $104.95

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B) $123.08

C) $126.48

D) $87.51

E) $108.35

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Chapter 8 Practice Problems 5) Kindzi Company has preferred stock outstanding that is expected to pay an annual dividend of $4.60 every year in perpetuity. If the required return is 4.49 percent, what is the current stock price?

A) $107.05

B) $92.20

C) $95.62

D) $102.45

E) $98.05

6) Stoneheart Group is expected to pay a dividend of $2.91 next year. The company's dividend growth rate is expected to be 4.2 percent indefinitely and investors require a return of 10.4 percent on the company's stock. What is the stock price? A) $27.98

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B) $44.59

C) $48.91

D) $42.24

E) $46.94

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Chapter 8 Practice Problems Answer Key Test name: Chapter 8 Practice

1) C P4 = ($.87 × 1.028)/(.09 – .028) = $14.43 P0 = $.37/1.09 + $.42/1.092 + $.57/1.093 + $.87/1.094 + $14.43/1.094 = $11.97 2) A P0 = [$2.55 × (1 + .055)]/(.097 – .055) = $64.05 3) B P = $4.10/(1 + .093) + $8.20/(1 + .093)2 + $11.05/(1 + .093)3 + $12.80/(1 + .093)4 P = $28.05 4) A P4 = ($3.40 × 1.204 × 1.03)/(0.089 – 0.03) = $123.08 P0 = ($3.40 × 1.20)/1.089 + ($3.40 × 1.202)/1.0892 + ($3.40 × 1.203)/1.0893 + ($3.40 × 1.204)/1.0894 + $123.08/1.0894 = $104.95

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Chapter 8 Practice Problems 5) D P0 = $4.60/.0449 = $102.45 6) E P0 = $2.91/(.104 – .042) = $46.94

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