QUESTION 4

Part A: The chairman of World Food Corporation announced that the firms dividends will grow at a rate of 18% for the next 3 years, and that thereafter the annual rate of growth is expected to be only 6%. The annual dividend per share is estimated to be $4 in the next year. If a required rate of return of 15% is assumed, what is the highest price you are willing to pay for a share of World Food Corporations common stock?

a. 51.59

b. 50.39

c. 49.56

d. 46.35

Part B:

Ashworth Corp has just paid its annual dividend of $8.00. The company has announced an aggressive expansion plan. The plan requires investment for the next three years. The company decides to fund the three years of expansion by not paying a dividend for three years. The company will resume paying dividends in year 4 with a dividend of $12.50 per share. After this, the company will grow its dividends at a rate of 8.0% thereafter {D1 = D2 = D3 = $-, D4 = $12.50, D5 = $12.50(1 + 8.0%), and so on}. The companys cost of equity is 12.0%. What is the price of the stock today (round to nearest $)?

		a. $178
		b. $196
		c. $205
		d. $214
		e. $222