1.An investor requires a return of 12 percent. A stock sells for $25, it pays a dividend of $1, and the dividends compound annually at 7 percent. Will this investor find the stock attractive? What is the maximum amount that this investor should pay for the stock?
2.A firm’s stock earns $2 per share, and the firm distributes 40 percent of its earnings as cash dividends. Its dividends grow annually at 7 percent.
a)What is the stock’s price if the required return is 10 percent?
b)The firm borrows funds and, as a result, its per-share earnings and dividends increase by 20 percent. What happens to the stock’s price if the growth rate and the required return are unaffected? What will the stock’s price be if after using financial leverage and increasing the dividend to $1, the required return rises to 12 percent? What may cause this required return to rise?
3.The annual risk-free rate of return is 9 percent and the investor believes that the market will rise annually at 15 percent. If a stock has a beta coefficient of 1.5 and its current dividend is $1, what should be the value of the stock if its earnings and dividends are growing annually at 6 percent?
4.You are considering two stocks. Both pay a dividend of $1, but the beta coefficient of A is 1.5 while the beta coefficient of B is 0.7. Your required return is K= 8% + (15% 2 8%)β.
a)What is the required return for each stock?
b)If A is selling for $10 a share, is it a good buy if you expect earnings and dividends to grow at 5 percent?
c)The earnings and dividends of B are expected to grow annually at 10 percent. Would you buy the stock for $30?
d)If the earnings and dividends of A were expected to grow annually at 10 percent, would it be a good buy at $30?
5.You buy a stock for $20. After a year the price rises to $25 but falls back to $20 at the end of the second year.What was the average percentage return and what was the true annualized return?
6.The S&P 500 declined 38.49 percent during 2008, its third-worst performance in history.What percentage increase is necessary to re- coup the 38.49 percent loss?