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Sample Problem—Stocks
1.
Firm X needs to net $6,500,000 from the sale of common stock.
Its investment banker has informed
the firm that the retail price will be $22 per share, and that the firm will receive $19 per share.
Outof
pocket costs are $100,000.
How many shares must be sold?
2.
What would you pay for a stock which just paid a $5 dividend if the expected dividend growth rate is
4% and you require a 16% return on your investment?
3.
Mack Industries just paid a dividend of $1.00 per share (i.e., D
0
= $1.00).
Analysts expect the
company’s dividend to grow 20 percent this year, and 15 percent next year.
After two years the
dividend is expected to grow at a constant rate of 5 percent.
The required rate of return on the
company’s stock is 12 percent.
What should be the current price of the company’s stock?
4.
ABC Company’s preferred stock is selling for $45 a share.
It is expected that the company will always
pay its constant preferred dividend.
If the required rate of return is 10%, what will be the dividend two
years from now?
5.
The Taussig Company, whose stock price now is $30, needs to raise $15 million in common stock.
The company will price the new issue at $27.53 per share and will net $25.60 per share after
underwriting costs.
Taussig will incur additional floatation expenses in the amount of $360,000.
How
many shares must Taussig set to net $15
6.
Ewald Company just paid a dividend of $0.68.
Dividends have been growing at 6 percent and are
expected to continue growing at that rate in the future.
If investors require a 14 percent rate of return
on similar investments, determine the present value of the company's stock.
7.
Phillips Industries common stock is currently selling for $50 and is expected to pay a dividend of $3.00
at the end of the year.
Determine the growth rate for Phillips Industries dividends assuming that
investors' required rate of return on this stock is 14 percent.
8.
An Allied Northern preferred stock pays a $3.84 annual dividend.
What is the value of the stock to an
investor who requires a 9.5 percent return?
9.
The last dividend paid by Klein Company was $1.00.
Klein's growth rate is expected to be 5 percent
for 2 years, after which dividends are expected to grow at a rate of 10 percent forever.
Klein's required
rate of return on equity is 12 percent.
What is the current price of Klein's common stock?
10.
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 Spring '07
 MCkenzie
 Finance

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