Question

10. Better Life Nursing Home, Inc. has maintained a dividend payment of $3 per share for many years. The same dollar dividend is expected to be paid in future years (or perpetuity). If investors require a 12% rate of return on investments of similar risk determine the value of the company's stock Choice: $15.00 Choice: $25.00 Choice: $33.33 Choice: $36.20

Answer 1

H 1 10) G Expected dividend in year 1= 3 per share Required rate of return = 12% Price per share = Dividend in year 1/(required rate of return - long term growth rate) Price per share = 3/(12% -0%) Price per share = 25 per share Choice B is correct 8 11) The dividend yield=DO(1+g)/P Dividend yield =1.5*(1+6%) / 15.75 = 10.10% Capital gains yield=(P(1+g)-P)/P Capital gains yield=(15.75(1+6%)-15.75)/15.75 = 6.00% Total return yield = dividend yield + capital gains yield = 10.1%+6% =16.1% Choice D is correct 16 12) 17 Current stock price = DO*(1+g)/(r-g) Current stock price = 2.5*(1-5%)/(16%+5%) Current stock price = 11.31 Stock price in 3 years = Current price*(1+g)^3 Stock price in 3 years = 11.31*(1-5%)^3 Stock price in 3 years = 9.70 24 13) Current stock price = DO*(1+g)/(r-g) Current stock price = 1.5*(1+4%)/(17.6%-4%) Current stock price = 11.47 required rate of return = risk free rate + beta (market return - risk free rate) required rate of return = 5%+1.8 (12% -5%) required rate of return = 17.600%