Show all work:

Question 1. ABC pays a current (annual) dividend of $1 and is expected to grow at 30% for two years and then at 5% thereafter. If the required return for ABC common stock is 8%, what is the intrinsic value of ABC stock? (Hint: Refer to end-of-the-chapter problem #4)

Question 2. Compute the required rate of return or the dividend growth rate.

(1) ABC just paid a dividend of $1.50, which is expected to grow indefinitely at

4%. If the current value of ABCs shares based on the constant-growth dividend discount model is $50, what is the required rate of return, k? (Hint: Refer to end-of-the-chapter problem #5)

(2) Computer stocks currently provide an expected rate of return of 10%. MBC, a large computer company, will pay a year-end dividend of $1.5 per share. If the stock is selling at $75 per share, what must be the markets expectation of the growth rate of MBC dividends, g? (Hint: Refer to end-of-the-chapter problem #17)

Question 3. ABC has an ROE of 20% and a plowback ratio of 80% (i.e., earnings retention ratio b = .6). The coming years earnings are expected to be $3.5 per share and the market capitalization rate is 14% (i.e., the cost of common equity k_e = .14).

(a) What will be the dividend per share in the coming year (D₁)?

(b) What is the sustainable growth rate, g?

(c) At what price, V₀, will the stock sell?

(d) What price, V₂, do you expect ABC shares to sell for in two years?