Question

11 The common stock of Auto Delivery mon stock of Auto Deliveries sells for $28,16 a share. The stock is expected to pay a $1.35 dividend next year and the market expects the firm to grow by 3% annually. What is the rate of return on the stock? 

7.42% 7.79% 19.67% 20.14% 20.86% 

12 Northern Gas recently paid a $2.80 annual dividend on its common stock. This dividend increases at a rate of 3.8% per year. The stock is selling for $26.91. What is the market expected rate of return?

  13.88% 14.03% 14.21% 14.37% 14.60% 

13 UMD pays an annual dividend that is expected to increase by 3.6 percent per year. The stock has a market rate of return of 12.6% and sells for $28.50 a share. What is the expected amount of the next dividend?

 $2.03 $2.57 $3.17 $2.20 $2.28 

14 The dividend yield is computed by dividing next year's quarterly dividend by the price of the current stock. 

True False

15 Alva Edison has a beta ratio of 0.75 and is expected to grow by 3.5% over the next 5 years. The current relevant US Treasury Rate is 2.45%. What is the expected return on equity for the firm if the expected market return is 8.25%? 

Answer 1

ANSWER :

11.

Given :

P₀ = 28.16 ($)

D₁ = 1.35 ($)

g = 3 % = 0.03

Now,

Market rate of return, r 

= D₁ / P ₀ + g

= 1.35 / 28.16 + 0.03

= 0.0779

= 7.79 %

Market rate of return is : Option B.   7.79%  (ANSWER). 

12. 

Given :

P0 = 26.91 ($)

D0 = 2.80 ($)

g = 3.8% = 0.038

So,

D₁ = 2.80(1 + 0.038) = 2.9064 ($)

Now,

Market rate of return, r 

= D1 / P 0 + g

= 2.9064 / 26.91 + 0.038

= 0.1460

= 14.60 % 

So, expected market rate of return = Option E. 14.60 % (ANSWER)>

13.

Given :

P0 = 28.50 ($)

r = 12.6% = 0.126

g = 3.6% = 0.036

Now,

r = D1 / P 0 + g

=> 0.126 =  D1 / 28.50 + 0.036

=> D₁ = (0.126 - 0.036) *28.50 

=> D₁ = 2.57 ($)

So, expected dividend next year = D₁ =  Option B. $2.57 (ANSWER) .

14.

B. False. 

15.

AS per CAPM model :

rE = rF + b ( rM - rF)

= 2.45 + 0.75 (8.25 - 2.45)

= 6.8 % 

So, expected return on equity = rE = Option B. 6.8% (ANSWER).

Answer 2

Calculate the rate of return as follows:

Rate of return = (Expected dividend/Price) + Growth rate

Rate of return = (1.35/28.16) + 3%

Rate of return = 7.79%.