quiz 2a - Finance 100 Corporate Finance Professor Michael R...

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Unformatted text preview: Finance 100: Corporate Finance Professor Michael R. Roberts Quiz 2 October 31, 2007 Name: Section: Question Maximum Student Score 1 30 2 40 3 30 Total 100 Instructions: • Please read each question carefully • Formula sheets are attached to the back of the quiz • To receive credit you must: (1) show all work, (2) clearly circle or box your final answers, and (3) express all numeric answer with at least 2 decimal places of precisions. • Good luck 1 1. (30 Points) GM is expected to pay dividends per share equal to $1.40 and $1.50 at the end of this year and the end of the following year, respectively. You expect GM’s stock price to be $25.00 at the end of two years (and just after the second dividend is paid out) and assume that GM’s equity cost of capital is 10%. (a) (5 Points) How much would you be willing to pay, per share, today for GM’s stock if you plan on holding the stock for two years? Solution: P = D 1 1 + r e + D 2 + P 2 (1 + r e ) 2 = 1 . 40 1 + 0 . 10 + 1 . 50 + 25 . 00 (1 + 0 . 10) 2 = 23 . 17 (b) (5 Points) Now suppose that you plan on holding GM’s stock for just one year. At what price do you anticipate being able to sell GM’s stock in one year from today? Solution: P 1 = D 2 + P 2 1 + r e = 1 . 50 + 25 . 00 1 + 0 . 10 = 24 . 09 2 (c) (5 Points) If you only hold GM’s stock for one year starting from today, what is the dollar value of your capital gains and the rate of capital gain (i.e., relative price appreciation). Solution: Capital Gain Dollars = P 1- P = 24 . 09- 23 . 17 = 0 . 92 Capital Gain Rate = P 1- P P = 24 . 09- 23 . 17 23 . 17 = 3 . 97% (d) (5 Points) If you only hold GM’s stock for one year starting from today, what is your prospective dividend yield from holding GM’s stock as of today?...
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quiz 2a - Finance 100 Corporate Finance Professor Michael R...

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