1. Common Stock Assumption #1: constant perpetuity

You are analyzing a share of ABC Company common stock for possible purchase. Assume that your analysis has revealed that you expect the stock to pay a constant, semiannual dividend of $125 per share. This dividend is expected to continue into the foreseeable future (i.e., forever). Your required rate of return on this stock is 8% per year, compounded semiannually. Further research reveals that this common stock has a market price of $4000 per share.

A. Draw a time line showing the next four dividends for this common stock (i.e., D₁, D₂, D₃, D₄).

B. Calculate the value of this common stock based on the required rate of return.

C. Calculate the expected return on this common stock based on the market price.

D. Should you invest in the stock? Why or why not? Be sure to use your results

from BOTH parts B and C above.

2. Common Stock Assumption #2: growing perpetuity

You are analyzing a share of XYZ Company common stock for possible purchase. Assume that your analysis has revealed that the most recent dividend paid (i.e., the previous or past dividend) was D₀ = $10 per share. Dividends are paid semiannually and are expected to grow at a rate of 6% per year into the foreseeable future (i.e., forever). Your required rate of return on this stock is 10% per year, compounded semiannually. Further research reveals that this common stock has a market price of $450 per share.

A. Draw a time line showing the next four dividends for this common stock (i.e., D₁, D₂, D₃, D₄).

B. Calculate the value of this common stock based on the required rate of return.

C. Calculate the expected return on this common stock based on the market price.

D. Should you invest in the stock? Why or why not? Be sure to use your results

from BOTH parts B and C above.

3. Common Stock Assumption #2: growing perpetuity

You are analyzing another share of XYZ Company common stock for possible purchase. Assume that your analysis has revealed that you expect the UPCOMING dividend to be D₁ = $2.50 per share. Dividends are paid semiannually and are expected to grow at a rate of 5% (compounded semiannually) per year into the foreseeable future (i.e., forever). Your required rate of return on this stock is 7% per year, compounded semiannually. Further research reveals that this common stock has a market price of $200 per share.

A. Draw a time line showing the next four dividends for this common stock (i.e., D₁, D₂, D₃, D₄).

B. Calculate the value of this common stock based on the required rate of return.

C. Calculate the expected return on this common stock based on the market price.

D. Should you invest in the stock? Why or why not? Be sure to use your results

from BOTH parts B and C above.