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CHAPTER 7: STOCKS or EQUITI 1. A stock is expected to pay the following dividends per share over the next three years, respectively $1.50, $1.95

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CHAPTER 7: STOCKS or EQUITI 1. A stock is expected to pay the following dividends per share over the next three years, respectively $1.50, $1.95 and $2.20. If you expect to be able to sell the stock for $54.26 in three years and your required rate of return is 8%, what is the most that you should be willing to pay for a share of this stock today? 2. (a) If Jones Company's preferred stock currently sells for $45.60. If your required rate of return is 6%, require in order to purchase Jones' preferred what is the minimum annual dividend that you would stock? (b) If the stock is selling for $25.30 and the annual dividend is $1.25, what would be the annual return on the stock? (c) If the annual dividend on this stock were $2.00 per share and the minimum rate of return you wanted to earn were 5%, what is the most that you would be willing to pay for a share of this stock? 3. Temple Lunch Trucks, Inc. just paid a dividend of 53.50. Dividends are expected to grow at a rate of 3% per year from here on out. If the required rate of return on this stock is 10%, what is the most that you should be willing to pay for a share of this stock today? 4. Temple Lunch Trucks, Inc. just paid a dividend of $3.50. Dividends are expected to grow at a rate of 4% per year from here on out. If the risk-free rate is 2.5%, the expected return on the market is 5% and Temple Lunch Trucks' stock has twice the average market risk, what is the most that you should be willing to pay for a share of this stock today? 5. If Temple Lunch Trucks' dividend in #3 above was expected to grow at a constant annual rate of 4% Instead of 3%, what is the most that you should be willing to pay for a share of this stock today? What Ean you conclude about the relationship between expected dividend growth and a stock's price? S. A firm will begin paying a constant annual dividend of $1.50 a share beginning five years from now. If ou require a rate of return of 7%, what is the most that you would be willing to pay for a share of this tock TODAY? A firm's stock price dropped to $25 overnight. Given its dividend growth rate of 4% and the last nnual dividend of $1.05, what is the implied required rate of return necessary to justify the new lower Market price of $25

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