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Practice Problems

# Practice Problems - Washington State University Finance 325...

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Washington State University Finance 325 1 Practice Problems (Stock Valuation) 1. Michael’s, Inc. just paid \$1.40 to their shareholders as the annual dividend. Simultaneously, the company announced that future dividends will be increasing by 4.5 percent. If you require an 8 percent rate of return, how much are you willing to pay to purchase one share of Michael’s stock? 2. Angelina’s made two announcements concerning their common stock today. First, the company announced that their next annual dividend has been set at \$2.16 a share. Secondly, the company announced that all future dividends will increase by 4 percent annually. What is the maximum amount you should pay to purchase a share of Angelina’s stock if your goal is to earn a 10 percent rate of return? 3. A stock pays a constant annual dividend and sells for \$31.11 a share. If the rate of return on this stock is 9 percent, what is the dividend amount? 4. You have decided that you would like to own some shares of GH Corp. but need an expected 12 percent rate of return to compensate for the perceived risk of such ownership. What is the maximum you are willing to spend per share to buy GH stock if the company pays a constant \$3.50 annual dividend per share? 5. Turnips and Parsley common stock sells for \$39.86 a share at a market rate of return of 9.5 percent. The company just paid their annual dividend of \$1.20. What is the rate of growth of their dividend? 6. B&K Enterprises will pay an annual dividend of \$2.08 a share on their common stock next week. Last year, the company paid a dividend of \$2.00 a share. The company adheres to a constant rate of growth dividend policy. What will one share of B&K common stock be worth ten years from now if the applicable discount rate is 8 percent? 7. The Red Bud Co. pays a constant dividend of \$1.20 a share. The company announced today that they will continue to do this for another 3 years after which time they will discontinue paying dividends permanently. What is one share of this stock worth today if the required rate of return is 7 percent? 8. Bill Bailey and Sons pays no dividend at the present time. The company plans to start paying an annual dividend in the amount of \$.30 a share for two years commencing two years from today. After that time, the company plans on paying a constant \$1 a share dividend indefinitely. How much are you willing to pay to buy a share of this stock if your required return is 14 percent? 9. Lee Hong Imports paid a \$1.00 per share annual dividend last week. Dividends are expected to increase by 5 percent annually. What is one share of this stock worth to you today if the appropriate discount rate is 14 percent?

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