Question

13. You are considering buying shares of stock in the Steel Mill. The forecast for the firm is steady growth over the next decade. The firm just paid its annual dividend of $1.42 per share and has plans to increase that amount by 4 percent annually indefinitely. You require a 12.5 percent return on this type of security. What is your estimate of the value of this stock ten years from now?
A. $24.13
B. $24.38
C. $24.73
D. $25.06
E. $25.72

14. A stock sells for $12.36 a share and has a required return of 9 percent. Dividends are paid annually and increase at a constant 3 percent per year. What is the amount of the last dividend paid?
A. $0.46
B. $0.50

C. $0.59 D. $0.63 E. $0.72

Answer 1

Solution (13) The value of this stock ten years from now Recent Dividend (D)= $1.42 Growth rate (g)=4% Required rate of return (r) = 12.5% Value of stock ten years from now = ? Value of stock (P10)== Dividend(Du) Required rate of return - Growth rate Dividend (D.)*(1+ Growth rate) Number of years Required rate of return - Growth rate $1.42*(1+4%)" 12.5%-4% $1.42 x1.53945405631508 8.50% _$2.18602476 8.50% = $25.72 Therefore, the value of a stock ten years from now is Op Note: The question is asking for stock price ten years from now, it's not asking for the current price.

Solution (14) The amount of last dividend paid Value of stock (P.)=$12.36 Required rate of return(r) = 9% Growth rate (g)=3% Dividend (D.)*(1+Growth rate) Value of stock (P.) = Required rate of return – Growth rate $12.36= Dividend (D.)*(1+3%) 9%-3% $12.36 _ Dividend (D. )*(1.03) 6% Dividend( D.) – $12.36x6% Dividend(D)= 1.03 = $0.72 Therefore, the amount of last dividend paid is Option (E). [$0.72].