Practice Problems for Midterm 2

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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.
30. Find the value of a share of preferred stock that pays $6.00 per year given a return of 16%. 31. What is the rate of return on a preferred stock that has a par value of $50, a market price of $46.50, and a dividend of $4.10? 32. If a share of preferred stock pays a quarterly dividend of $1.50, has a $40 par value, and is currently selling for $50.00, it is earning an annual return of: 33. A share of Jones Inc. preferred stock pays a dividend of $1.25 each quarter. You are willing to pay $37.50 for this stock. Your annual return on the investment is: 34. You have invested in a project that has the following payoff schedule: Payoff Probability of Occurrence $40 .15 $50 .20 $60 .30 $70 .30 $80 .05 What is the expected value of the investment's payoff? (Round to the nearest $1) 35. Which of the following investments is clearly preferred to the others? Investment A 18% 20% B 20% 20% C 20% 18% k F 36. Sibling Incorporated has a beta of 1.0. If the expected return on the market is 14%, what is the expected return on Sibling Incorporated's stock? 37. PDQ Company's common stock has a beta of 1.2. If the expected risk free return is 4% and the market offers a risk premium of 7% over the risk free rate, what is the expected return on PDQ's common stock? 38. Car Buff, Inc. common stock has a beta of 1.3. If the expected risk free return is 4% and the expected market risk premium is 12%, what is the expected return on Car Buff’s stock? 39. If there is a 20% chance we will get a 16% return, a 30% chance of getting a 14% return, a 40% chance of getting a 12% return, and a 10% chance of getting an 8% return, what is the expected rate of return? 40. According to the capital asset pricing model, if the risk free rate is 5.5%, and the market return is 14%, a security with a beta of 1.4 should return what? 41. You are considering investing in a project with the following possible outcomes: States Probability of Occurrence Investment Returns State 1: Economic boom 15% 16% State 2: Economic growth 45% 12% State 3: Economic decline 25% 5% State 4: Depression 15% -5% Calculate the expected rate of return and standard deviation of returns for this investment, respectively. 42. If you hold a portfolio made up of the following stocks: Investment Value Beta Stock A $2,000 1.5 Stock B $5,000 1.2 Stock C $3,000 .8 What is the beta of the portfolio?
Page 1: University of Rio Grande Financial

Practice Problems for Midterm 2

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