Practice Problems for Midterm 2

16. Analysts expect a stock to be selling for $22 in one year. It is also expected to pay a $1 dividend during the
year. If you require a 15% return on this kind of investment, what is the most you can pay for the stock today.
17. Assume a dividend today of $2.50 with anticipated growth over the next three years of 10%. The estimated
dividend at the third year is:
18. Sharbaugh Inc.'s most recent dividend was $2.00 per share. The dividend is expected to grow at a rate of 4%
per year for the foreseeable future. If the market return is 13% on investments with comparable risk, what
should the stock sell for today?
19. A stock just paid a $2.00 dividend that is anticipated to grow at 6% indefinitely. Similar stocks are returning
about 13%. The estimated selling price of this stock is:
20. A stock is selling for $20.00 (P 0 ). The projected selling price one year from now (P 1 ) is $22.50, and the
projected dividend payment one year from now (D 1 ) is $1.00. What is the expected return on an investment in
the stock made today?
21. A share of stock is currently selling for $31.80. If the anticipated constant growth rate for dividends is 6% and
investors are seeking a 16% return, what is the dividend just paid?
22. You are considering investing in B & B, Inc.'s stock and your broker has told you that you can purchase it for
$72. You require a return 12% for this type of investment. The last dividend (D 0 ) that B & B paid was $4 and a
6% constant growth rate is anticipated. Should you purchase B & B, Inc.?
23. Fast Wheels, Inc. expects to pay an annual dividend of $0.72 next year. Dividends have been growing at a
compound annual rate of 6 percent and are expected to continue growing at that rate. What is the value of a
share of Fast Wheels if similar stocks return 14 percent?
24. Pace Enterprises' common stock sells for $29, and its dividends are expected to grow at a rate of 9 percent
annually. If investors in Pace require a return of 14%, what is the expected dividend next year?
25. Delta Company has some very exciting prospects in the near future. As a result it is expected to grow at a rate
of 20% for the next year. After that it will grow at 7% indefinitely. The interest rate is currently 14% and Delta
paid a dividend of $2.60 recently. What should Delta sell for today?
26. Genestek Inc. just paid a $5.00 dividend. Due to a new product about to be released, analysts expect the
company to grow at a supernormal rate of 15% for three years. After that it is expected to grow at a normal
rate of 4% indefinitely. Stocks similar to Genestek are currently earning shareholders a return of 12%. The
estimated selling price of the stock is:
27. Static Inc. has had a hard time recently. In order to help the firm survive a downturn in the market for its
products, management has announced that it doesn't plan to pay dividends for the next three years. A modest
dividend of $2.00 is projected for the fourth year after which dividends are expected to grow at 5% indefinitely.
Similar stocks return 10%. How much should Static's stock sell for today?
28. Sudberry Systems Corp. is launching a new product that analysts expect will propel its growth to 18% for about
a year. After that everyone expects the firm to return to a more normal 5% growth rate indefinitely. Sudberry
recently paid an annual dividend of $3.50. Similar stocks are currently returning 9%. What is the most an
investor should be willing to pay for a share of Sudberry?
29. Frazier Inc. paid a dividend of $4 last year (D 0 ). The firm is expecting dividends to grow at 21% in years 1-2
and 10% in Year 3. After that growth will be constant at 8% per year. Similar investments return 14%.
Calculate the value of the stock today.