P7-6 

Common stock value: Zero growth Kelsey Drums Inc. is a well-established sup- plier of fine percussion instruments to orchestras all over the United States. The company's class A common stock has paid a dividend of $2.80 per share per year for the last 12 years. Management expects to continue to pay at that amount for the foreseeable future. Kim Arnold purchased 200 shares of Kelsey class A common stock 10 years ago at a time when the required return for the stock was 7.6%. She wants to sell her shares today. The current required rate of return for the stock is 9.25%. How much capital gain or loss will Kim have on her shares?

P7-9 

Common stock value: Constant growth McCracken Roofing Inc. common stock paid a dividend of $1.20 per share last year. The company expects earnings and divi-dends to grow at a rate of 5% per year for the foreseeable future.

a. What required rate of return for this stock would result in a price per share of $28?

b. If McCracken expects both earnings and dividends to grow at an annual rate of 10%, what required rate of return would result in a price per share of $28?