Topic 2 Warm Up Problems with Solutions

Topic 2 Warm Up - Warm up Problems for Topic 2(Stocks*These questions are designed to represent elementary principles and are NOT representative of

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Unformatted text preview: Warm up Problems for Topic 2 (Stocks) **These questions are designed to represent elementary principles, and are NOT representative of problems that you will find on any exams. 1. Analysts have forecasted IDM’s dividend next year to be $2 per share. The current cost of equity capital for similar firms is 12% per annum. What is the current share price of IDM if: 1a) dividends are expected to remain constant? 1 $2 $16.67 0.12 e D P r g = = = − − 1b) dividends are expected to grow at 8% per annum? 1 $2 $50 0.12 0.08 e D P r g = = = − − 1c) dividends are expected to grow at –2% per annum? ( ) 1 $2 $14.29 0.12 0.02 e D P r g = = = − − − 2. Macrosoft currently has a share price of $20 and a forecasted dividend for next year of $1 per share. If the growth rate of dividends is estimated as 3% per annum, what is Macrosoft’s cost of equity capital? 1 1 1 0.03 0.08 (or 8%) 20 e e D D P r g r g P = ⇒ = + = + = − 2a) If there are currently 2.5 million shares outstanding, what is Macrosoft’s market capitalization? If there are currently 2....
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This document was uploaded on 06/09/2010.

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Topic 2 Warm Up - Warm up Problems for Topic 2(Stocks*These questions are designed to represent elementary principles and are NOT representative of

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