1. Anderson Motors Inc. has just set the company dividend policy at $0.50 per year. The company plans to be in business forever. What is the price of this stock if

a. An investor wants a 5% return?

b. An investor wants an 8% return?

c. An investor wants a 10% return?

d. An investor wants a 13% return?

e. An investor wants a 20% return?

Answer: Use the constant dividend infinite dividend stream model:

Price = Dividend/r

a.

b.

c.

d.

e.

2. King Waterbeds has an annual cash dividend policy that raises the dividend each year by 4%. Last years dividend was $0.40 per share. What is the price of this stock if

a. an investor wants a 5% return?

b. an investor wants an 8% return?

c. an investor wants a 10% return?

d. an investor wants a 13% return?

e. an investor wants a 20% return?

Answer: Use the constant growth dividend model with infinite horizon:

Price = Last Dividend (1 + g)/(r - g)

a.

b.

c.

d.

e.

3. Martin Winery wants to raise $10 million from the sale of preferred stock. If the winery wants to sell 1 million shares of preferred stock, what annual dividend will it have to promise if investors demand the following return:

a. 12%.

b. 18%.

c. 8%.

d. 6%.

Answer: Use the constant dividend model with infinite horizon, rearranged for the dividend:

Dividend = r Price

The price of the shares is $10,000,000/1,000,000 = $10.00 per share