Questions 1 to 3:

Celestila Moonn, an UMB MBA student was doing her second internship as an equity analyst at SchoolStreet. Moonn was assigned a task of developing mean return estimates for 20 stocks as preparation for a portfolio optimization.

Task -1: UMA Corporation

The current dividend of $2.30 is expected to grow at 6 percent indefinitely and the required rate of return on the stock is 13 percent. The current price of the UMA stock is trading at $50. Moon was wondering what constant dividend growth rate that would be required to justify the current market price of $50.

Task -2: UML, Inc.

UML currently pays no dividend and will not pay one for several years. Moonn believes that UML begins paying a dividend of $2.50 five years from now, and the dividend is expected to grow at 5 percent thereafter. The required rate of return on UML stock is 12 percent. Moonn wants to use the Gordon Growth model to value UML, however, she was not sure whether this future dividend stream needs to be discounted back to find the value of UML stock

Using the information in Task-1, Moonn calculates the value of UMA stock is close to:

A.

$ 34.83

B.

$33.05

C.

$34.05

Using the information in Task-1, Moonn calculates the growth rate that justify the market

price of $50.

A.

8.03%

B.

7.09%

C.

7.35%

Using the information in Task- 2, Moonn calculates the value of UML stock that an investor will be willing to pay for today is close to

A.

$23.71

B.

$35.71

C.

$22.70