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Problem Set #2
Business Finance (03075 & 03085)
Please note that you do not have to submit your answers.
They will not be graded.
But,
similar questions will appear in the quiz.
Answer keys will be uploaded at Blackboard
soon.
1.
(
Dividend Discount Model
) A common stock just paid an annual dividend of $2
yesterday.
The dividend is expected to grow at 8 percent annually for the next three
years, after which will grow at 4 percent in perpetuity.
The appropriate discount rate
is 12 percent.
What is the price of the stock?
2.
(
Dividend Discount Model
) Consider the stock of Davidson Company, which will pay
annual dividend of $2 one year from today.
The dividend will grow at a constant
annual rate of 5 percent, forever.
The market requires a 12percent return on the
company’s stock.
a.
What is the current price of a share of the stock?
b.
What will the stock price be 10 years from today?
3.
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 Fall '08
 Goldreyer
 Finance

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