Tutorial 5 - Mon, Feb 28 (2)

Tutorial 5 - Mon, Feb 28 (2) - R = 11.98 3 Joe Corp plans...

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Tutorial 5: Mon, Feb 28, 2011 1. Joe Corporation is expected to pay a dividend of $2 in one year. Dividends are expect to grow by 4%/year. Investors require a rate of return of 12% for companies like Joe Corp. a) What is the stock selling for now? $25 b) What is the stock worth 3 years from now? $28.12 2. Joe Corp just paid a dividend of $1. Over the first year, analysts expect dividends to grow 15%. The next year, it will grow at 13% and then settle at 10% from then on. a) If investors require a rate of return of 12%, how much should you pay for this stock now? $59.06 b) If you buy the stock at the price found in part (a) above, and sell it after 2 years (after getting the dividend), what is your realized return? Your dividends were reinvested at a rate of 10%.
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Unformatted text preview: R = 11.98% 3. Joe Corp plans to pay a dividend tomorrow of $2. The dividends grow at a constant rate of 5% per year. The required return is 15%. a) What is the stock price? $21 b) You decide to sell the stock in 3 years. You stuffed the dividends in your couch during that period. What is your realized return? 16.2% 4. Effective monthly rate is 1%. How do we get the APR? EAR? APR: 12% EAR: 12.68% 5. Interest is 4%/ quarter. What is the APR? Effective semi-annual rate? APR: 16% ESR: 8.16% 6. You bought a 13% semi annual coupon bond with face value $1000, 5 years ago for $950. Today, you decide to sell the bond for 1050. The coupons you received were invested at a rate of 3% annually. What is your realized return? 12.94%...
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