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Unformatted text preview: FNAN 301, Summer C 2010, quiz 3, solutions Price one stock to find growth rate of a second stock 1. Lamar owns one share of stock of Starfish Inc. and one share of stock of Fractional Fruit Corporation. The total value of his holdings is $85. Both stocks pay annual dividends that are expected to continue forever. The expected return on Starfish stock is 8.0 percent and its annual dividend is expected to remain at $4.30 forever. The expected return on Fractional Fruit stock is 7.4 percent. The next dividend paid by Fractional Fruit is expected to be $1.45 and all subsequent dividends are expected to grow at a constant rate. What growth rate is expected for Fractional Fruit dividends? Assume the next dividend for both firms’ stocks will be paid in one year. 1. Lamar owns one share of stock of Starfish Inc. and one share of stock of Fractional Fruit Corporation. The total value of his holdings is $75. Both stocks pay annual dividends that are expected to continue forever. The expected return on Starfish stock is 8.0 percent and its annual dividend is expected to remain at $3.70 forever. The expected return on Fractional Fruit stock is 7.4 percent. The next dividend paid by Fractional Fruit is expected to be $1.70 and all subsequent dividends are expected to grow at a constant rate. What growth rate is expected for Fractional Fruit dividends? Assume the next dividend for both firms’ stocks will be paid in one year. Quantitative: find price with nonconstant dividend growth model 2. The annual dividend paid by Bumpy Coasters Corp. common stock is expected to be $0 in 1 year, $8.00 in 2 years, and $6.00 in 3 years, and then grow by 1.5 percent a year forever after the expected dividend is paid in 3 years. In other words, the dividend expected in 4 years is 1.5 percent greater than the dividend expected in 3 years, the dividend expected in 5 years is 1.5 percent greater than the dividend expected in 4 years, etc. If the expected return on the stock is 14.0 percent, then what is the current price of one share of Bumpy Coasters stock? 2. The annual dividend paid by Bumpy Coasters Corp. common stock is expected to be $0 in 1 year, $6.00 in 2 years, and $8.00 in 3 years, and then grow by 4.5 percent a year forever after the expected dividend is paid in 3 years. In other words, the dividend expected in 4 years is 4.5 percent greater than the dividend expected in 3 years, the dividend expected in 5 years is 4.5 percent greater than the dividend expected in 4 years, etc. If the expected return on the stock is 17.0 percent, then what is the current price of one share of Bumpy Coasters stock? 1 FNAN 301, Summer C 2010, quiz 3, solutions Quantitative: compute NPV 3. Which assertion is true if a project has the following expected cash flows and the cost of capital for the project is 3.7%?...
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 Spring '09
 MURRAY
 Depreciation, Net Present Value

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