Topic 2 Warm Up Problems

Topic 2 Warm Up Problems - Warm up Problems for Topic...

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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? 1b) dividends are expected to grow at 8% per annum? 1c) dividends are expected to grow at –2% per annum? (think of a failing company) 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? 2a) If there are currently 2.5 million shares outstanding, what is Macrosoft’s market capitalization? 3. Slalomon has just issued you a growing perpetuity (ignore the illegality of the security), which has annual payments growing at 8% each year. The first payment of $100 will be received exactly one year from today. If the payments growing at 8% each year....
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