Question 1. Your broker recommends that you purchase Good Mills at $30. Th

1. Your broker recommends that you purchase Good Mills at $30. The stock pays a $2.20 annual dividend, which (like its per share earnings) is expected to grow annually at 8 percent. If you want to earn 15 percent on your funds, is this stock a good buy? 2. If you purchase Large Oil, Inc. for $36 and the firm pays a $3.00 annual dividend which you expect to grow at 7.5 percent, what is the implied annual rate of return on your investment? 3. Two stocks each pay a $1 dividend that is growing annually at 8 percent. Stock A’s beta = 1.3; stock B’s beta = 0.8.
If Treasury bills yield 9 percent and you expect the market to rise by 13 percent, what is your risk-adjusted required return for each stock?
Using the dividend-growth model, what is the maximum price you would be willing to pay for each stock?
Why are their valuations different?
4. What is the value of a common stock if
the firm’s earnings and dividends are growing annually at 10 percent, the current dividend is $1.32, and investors require a 15 percent return on investments in common stock?
What is the value of this stock if you add risk to the analysis and the firm’s beta coefficient is 0.8, the risk-free rate is 9 percent, and the return on the market is 15 percent?
If the price of the stock is $35, what is the rate of return offered by the stock? Should the investor acquire this stock? 5. What is the annual rate of return on an investment in a common stock that cost $40.50 if the current dividend is $1.50 and the growth in the value of the shares and the dividend is 8 percent? 6. What is the value of a preferred stock that pays an annual dividend of $3 a share and competitive yields are 5%, 10%, and 15%?
7. A firm has the following preferred stocks outstanding: PFD A: $40 annual dividend; $1,000 par value; no maturity
PFD B: $95 annual dividend; $1,000 par value; maturity after twenty-five years

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