1. You believe that next year XYZ plc will pay a dividend of 2 on its common stock. Thereafter you expect dividends to grow at a rate of 4% a year in perpetuity. If you require a return of 12% on your investment, how much should you be prepared to pay for the stock?

2.You are asked to put a value on a bond which promises eight annual coupon payments of 50 and will repay its face value of 1000 at the end of eight years. You observe that other similar bonds have yields to maturity of 9 per cent. How much is this bond worth? 2 marks

3.You are offered the bond from question 2 for a price of 755.5. What yield to maturity does this represent? 2 marks

2. Phoenix Corporation has pulled off a miraculous recovery. Four years ago it was near bankruptcy. Now it is making excellent progress.

Phoenix has just announced a 1 per share dividend, the first since the crisis hit. Analysts expect an increase to a 'normal' 3 dividend as the company completes its recovery over the next three years. After that, dividend growth is expected to settle down to a moderate long-term growth rate of 6%. 2 marks

Phoenix stock is selling at 50 per share. What is the expected long-run rate of return from buying the stock at this price? Assume dividends of 1, 2 and 3 for years 1, 2 and 3. A little trial and error will be necessary to find r. 2 marks

5.It is 1 July 2015. Martins plc has gone through a period of retrenchment which has meant that for the last six years dividends have been held constant at 5p per share per annum. A dividend of 5p per share has been paid on the 30 June 2015. The market expects the annual dividends to remain at this level for the next three years (the next dividend is due in one year's time) and then to increase at a rate of 5% per annum thereafter. The cost of equity capital for Martins plc is 10% per annum. Later in the day, Martins plc announces a lucrative new partnership deal with Finlay plc which it expects will significantly affect future dividends. The market revises its expectations of future dividends as follows:

Expected dividend on 30 June 2016 0p

Expected dividend on 30 June 2017 7p

Expected dividend on 30 June 2018 10p

Expected dividend on 30 June 2019 10p

Expected dividends on 30 June 2020 will be 6% higher than the 2019 figure and growth of 6% per annum is expected from then on.

However, the market believes that the partnership increases the riskiness of Martins plc with the result that the cost of equity capital rises to 14%.

Use a dividend share valuation model to determine the impact of the new partnership on the current share price. (You will need to calculate the share price before and after the announcement). 10 marks