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Finance 320 Problem Set#7
I.
The stock of Merton Inc. currently has a required rate of return of 15% and its dividends are growing at the rate
of 3% per year. If Merton just paid a dividend of $1 this year, what is the current price of a share of Merton
stock based on the Dividend Growth Model?
2.
Black and Scboles Co. is expected to maintain a constant 4% growth rate in its dividends indefinitely.
If the
company has a dividend yield of 6%, what is the required return on Black and Scholes' stock?
3.
You want to estimate the current price of a share of Duffie Corp. stock. You know that next year's dividend is
expected to be $2.20 and the growth rate of dividends is 5%. You look in the Wall Street Journal and fmd that
the riskfree interest rate is 4%. You also know from looking in Valueline that Duffie Corp. has a beta of 1.35.
If the required return on the market is currently 12%, what is Duffie's current share price?
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 Fall '10
 Sapp
 Finance, Merton Inc., Duffie Corp.

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