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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 ABC's 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 market's 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 year's earnings are expected to be $3.5 per share and the market capitalization rate is 14% (i.e., the cost of common equity ke = .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?