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# solve08 - FNCE 3010(Durham HW 8(Stocks 1 The...

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FNCE 3010 (Durham) HW 8 (Stocks) 1. The Jackson-Timberlake Wardrobe Co., just paid a dividend of \$1.40 per share on its stock. The dividends are expected to grow at a constant rate of 6 percent per year, indefinitely. If investors require a 12 percent return on The Jackson- Timberlake Wardrobe Co., stock, what is the current price? Solution: P 0 = D 1 / ( R - g ) = D 0 × (1 + g ) / ( R - g ) = 1 . 4 × 1 . 06 / ( . 12 - . 06) = \$24 . 73 2. Ayden, Inc., has an issue of preferred stock outstanding that pays an \$8.25 dividend every year, in perpetuity. If this issue currently sells for \$113 per share, what is the required return? Solution: R = C/P = 8 . 25 / 113 = . 073 = 7 . 3% 3. Rizzi Co. is growing quickly. Dividends are expected to grow at a 25 percent rate for the next three years, with the growth rate falling off to a constant 7 1

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percent thereafter. If the required return is 13 percent and the company just paid a \$2.80 dividend, what is the current share price? Solution: D1 = 2.8*1.25 = 3.50 D2 = D1*1.25 = 4.3750 D3 = D2*1.25=5.47 P3 = D4/(R-g) = 1.07*5.47/(.13-.07) = 97.526 Enter these cash flows in your calculator and compute NPV: cf1=3.5, cf2=4.375, cf3=5.47+97.526
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