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Managerial Economics (ARE) 143
University of California, Davis
Instructor: John H. Constantine
Chapter 6—Common Stock Valuation
Problem 1:
WorldTour Co. has just now paid a dividend of $2.83 per share; the dividends are expected to grow at a constant
rate of 6% per year forever. If the required rate of return on the stock is 16%, what is the current value on stock,
after paying the dividend?
Problem 2:
MJ Co. pays out 60% of its earnings as dividends. Its return on equity is 15%. What is the stable dividend growth
rate for the firm?
Problem 3:
The InTech Co. has just paid a dividend of $1 per share. The dividends are expected to grow at 25% per year for
the next three years and at the rate of 5% per year thereafter. If the required rate of return on the stock is 18%,
what is the current value of the stock?
Problem 4:
Ocean Co. has paid a dividend $2 per share out of earnings of $4 per share. If the book value per share is $25,
what is the expected growth rate in dividends (g)?
Problem 5:
Universal Air is a no growth firm and has two million shares outstanding. It is expected to earn a constant 20
million per year on its assets. If all earnings are paid out as dividends and the cost of capital is 10%, calculate the
current price per share for the stock.
Problem 6:
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 Spring '08
 Brinkley,G
 Dividend, Dividend yield, share, Price per share

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