a) You are planning to buy a stock, which is estimated to pay dividends of $2.10 next year and grow continuously at a 6% rate. If your required rate of return for this stock is 15%, what should you pay for it?

(What happens to your answer to problem (a), if g increases, k increases, or D increases?)

b) If you can sell the above stock in three years at a price of $35 (realizing three years of dividends as well), what price should you pay for it?

c) If the conditions of part (a) hold true, what should you be able to sell the stock for in three years?

d) ATT currently (t=0) pays a dividend of $2.46 and has a required return of 13%. If the company pays out 60% of its earnings and generates a consistent 12% return on equity, compute its stock price.

e) A preferred stock pays dividends at a 9% rate on $100 par value. Compute the price if market rates are currently 11%.

f) If a common stock pays a dividend next year of one dollar and has a current selling price of $12 with expected future growth to be a consistent 6%, what return is the stock providing.

g) If that same stock has a P/E ratio of 8, compute its EPS and payout ratio

Answer rating: 100% (QA)

a To find out what you should pay for the stock you can use the Gordon Growth Model also known as the Dividend Discount Model P Dk g Where P is the pr... View the full answer