FIN2004
Tutorial 6
#1 : A substantial percentage of the companies listed on the NYSE and NASDAQ don’t pay dividends, but investors are nonetheless willing to buy shares in them. How is this possible? #2: Suppose a company has a preferred stock issue and a common stock issue. Both have just paid a $2 dividend. Which do you think will have a higher price, a share of the preferred or a share of the common? #3: The Jackson-Timberlake Wardrobe Co. just paid a dividend of $1.95 per share on its stock. The dividends are expected to grow at a constant rate of 6 percent per year, indefinitely. If investors require an 11 percent return on The Jackson-Timberlake Wardrobe Co. stock, what is the current price? What will the price be in three years? In 15 years? #4: Great Pumpkin Farms (GPF) just paid a dividend of $3.50 on its stock. The growth rate in dividends is expected to be a constant 5 percent per year, indefinitely. Investors require a 14% return on the stock for the first three years, a 12 percent return for the next three years, and then a 10 percent return thereafter. What is the current share price? #5: Far Side Corporation is expected to pay the following dividends over the next four years: $11, $8, $5, and $2. Afterwards, the company pledges to maintain a constant 5 percent growth rate in dividends, forever. If the required return on the stock is 12 percent, what is the current share price? #6:E-Eyes.com Bank just issued some new preferred stock. The issue will pay a $20 annual dividend in perpetuity, beginning 20 years from now. If the market requires a 6.4 percent return on this investment, how much does a share of preferred stock cost today? #7: Consider four different stocks, all of which have a required return of 19 percent and a most recent dividend of $4.50 per share. Stocks W, X, and Y are expected to maintain constant growth rates in dividends for the