Michael's, Inc., just paid $2.75 to its shareholders as the annual dividend. Simultaneously, the company announced that future dividends will be increasing by 5.9 percent. If you require a rate of return of 10.1 percent, how much are you willing to pay today to purchase one share of the company's stock?

Michael's, Inc., just paid $2.75 to its shareholders as the annual dividend. Simultaneously, the company announced that future dividends will be increasing by 5.9 percent. If you require a rate of return of 10.1 percent, how much are you willing to pay today to purchase one share of the company's stock?

Multiple Choice

·       

$28.83

·       

$72.09

·       

$18.20

Incorrect

·       

$34.67

·       

$69.34

Correct

Explanation

P₀ = [$2.75 × (1 + .059)]/(.101 – .059) = $69.34

Stoneheart Group is expected to pay a dividend of $3.01 next year. The company's dividend growth rate is expected to be 4.7 percent indefinitely and investors require a return of 10.9 percent on the company's stock. What is the stock price?

Multiple Choice

·       

$27.61

·       

$43.69

·       

$50.83

·       

$48.55

Correct

·       

$46.12

Explanation

P₀ = $3.01/(.109 – .047) = $48.55

A stock is expected to maintain a constant dividend growth rate of 4.8 percent indefinitely. If the stock has a dividend yield of 6.1 percent, what is the required return on the stock?

Multiple Choice

·       

10.2%

·       

10.9%

Correct

·       

9.8%

·       

10.3%

·       

9%

Explanation

Required return = 4.8% + 6.1% = 10.9%