Question

1) The Lawrence Sisters Moving Company paid a quarterly dividend of $1.43 per share last quarter. Today, the company announced that future dividends will be increasing by 1.45 percent quarterly. If you require a 12.5 percent rate of return, how much are you willing to pay to purchase one share of this stock today? a) $73.72 b) $87.88 c) $86.61 d) $88.23 e) $93.59 2) Baggins Systems is a firm that has encountered some financial difficulties. The company projects that they will have enough cash flow to continue paying their current dividend for 6 more years before they must stop paying a dividend altogether. The company just paid a dividend of $13.25, and will continue to pay the same dividend for the next 6 years, after which they will never pay another dividend. What is the value of their stock if the discount rate is 6.25%? a) $71.64 b) $64.65 c) $62.19 d) $60.30 e) $59.76

Answer 1

1) Solution :-

#1.43 Quartely dividend (Pa) Guartely Gouth (a) Rate ot retuan 12.5% 12.S Quartely ade ot rctuan -3.135. or 0.03125 Now Paice ot one Share today Do (1+ 1.430+ 0.0145 0.0313S O.0145 143(1.0145) O.. 01670 1.y50735 O. 01675 $86.61 So you are Willing to pay 86.61 do purchase one share of this stock today

2) Solution :-

Annual diidend (A) 13.25 Discount aate lo) 6.2S Or 0.0625 No of Years bn)z 6 yeas Nou Value ot Stock 13. 25 0.0675 O.0685 13. a5 O.0625 , 0625) 13.25 O.0625 7.4387112259 O.43811122S97 1,43811122S97 212 64.65 (A