# 2024 – 1 A stock is expected to pay a year end dividend of 2 00 i e D1 2 00 The dividend is

Rentz RVs Inc. (RRV) – 2024

2024 – 1 A stock is expected to pay a year end dividend of 2 00 i e D1 2 00 The dividend is.

1. A stock is expected to pay a year-end dividend of $2.00, i.e., D1 = $2.00. The dividend is expected to decline at a rate of 5% a year forever (g = -5%). If the company’s expected and required rate of return is 15%, which of the following statements is CORRECT?

## Current stock price

a. The company’s current stock price is $20.

b. The company’s dividend yield 5 years from now is expected to be 10%.

## Constant growth model

c. The constant growth model cannot be used because the growth rate is negative.

d. The company’s expected capital gains yield is 5%.

e. The company’s stock price next year is expected to be $9.50.

2. A share of common stock has just paid a dividend of $2.00. If the expected long-run growth rate for this stock is 2.0%, and if investors’ required rate of return is 10.5%, what is the stock’s intrinsic value?

3. E. M. Roussakis Inc.’s stock currently sells for $50 per share. The stock’s dividend is projected to increase at a constant rate of 4% per year. The required rate of return on the stock, rs, is 15.50%. What is Roussakis’ expected price 5 years from now?

4. Carter’s preferred stock pays a dividend of $2.00 per quarter. If the price of the stock is $60.00, what is its nominal (not effective) annual expected rate of return?

## Risk-free rate

5. Schnusenberg Corporation just paid a dividend of $1.25 per share, and that dividend is expected to grow at a constant rate of 7.00% per year in the future. The company’s beta is 1.35, the required return on the market is 10.50%, and the risk-free rate is 4.00%.

6. Rentz RVs Inc. (RRV) is presently enjoying relatively high growth because of a surge in the demand for recreational vehicles. Management expects earnings and dividends to grow at a rate of 30% for the next 4 years, after which high gas prices will probably reduce the growth rate in earnings and dividends to zero, i.

e., g = 0. The company’s last dividend, D0, was $1.25. RRV’s beta is 1.20, the market risk premium is 5.25%, and the risk-free rate is 3.00%.

7. Using the information on Rentz RVs Inc. from problem 6, what is the dividend yield expected for the next year?

8. The Wei Company’s last paid dividend was $2.75. The dividend growth rate is expected to be constant at 2.50% for 2 years, after which dividends are expected to grow at a rate of 8.00% forever. Wei’s required return (rs) is 12.00%. What is the intrinsic value of Wei’s stock?

## Wei company

9. Using the information on Wei Company from problem 8, what should be the price of Wei’s stock at the end of Year 5

10. You are an analyst studying Beranek Technologies, which was founded 10 years ago. It has been profitable for the last 5 years, but it has needed all of its earnings to support growth and thus has never paid a dividend. Management has indicated that it plans to pay a $0.50 dividend 3 years from today, then to increase it at a relatively rapid rate for 2 years with 50% dividend growth in year 4 and 25% dividend growth in year 5, and then to increase its dividend at a constant growth rate of 6.

00% per year thereafter. Assuming a required return of 15.

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