Reference no: EM132495402

Question 1: Top Performance Company has a policy of paying a $9 per share dividend every year. If this policy is to be continued indefinitely, what is the value of a share of stock if the required return is 20 percent? (Hint: Please use ordinary perpetuity formula)

Question 2: The next dividend for the Dynamic Company will be $5 per share. Investors require a 14 percent return on companies such as Dynamic. Dynamic's divident increases by 6 percent every year.Based on the dividend growth model, what is the value of Dynamic's stock today? Hint: Formula for dividend growth model is as follows: Po = D1/(R-g)

Question 3: How much are you willing to pay for one share of Red Snapper stock if the company just paid a $0.60 annual dividend, the dividends increase by 2.4 percent annually, and you require a 9 percent rate of return? (Hint: This amounts to a Nonconstant growth, and the formula is as follows: Po =Do x (1 + g)/(R-g) where D=Dividend paid, g =growth rate, R =Required return)

Question 4: New generation Studio Inc. paid $2.30 per share annual dividend last week. Dividends are expected to increase by 4.65 percent annually. What is one share of this stock worth to you today if your required rate of return is 14 percent? (Hint: This amounts to a Nonconstant growth in dividend)

Question 5: KMT Manufacturing Company made two announcements concerning its common stock today. First, the company announced that the next annual dividend will be $1.64 a share. Secondly, all dividends after that will decrease by 1.45 percent annually. What is the maximum amount you should pay to purchase a share of this stock today if you require a 12% rate of return? (Hint: If the dividend grows at a steady rate, g, then the purchase price can be written as Constant Growth Case as follows: Po = D1/R-g where D1,future dividends, R =Required rate of growth, r - steady growth rate. Please note that the growth rate is negative.)

Question 6: Micro Computers Inc has the following capital structure:

Debt 60%

Common equity 40% The aftertax cost of debt is 8%, and the cost of common equity (in the form of retained earnings) is 15 percent. What is the firm's weighted average cost of capital)?

Cost (after tax) Weights Weighted Cost

Debt (Kd) 0 0 0.00%

Common equity (Ke)

(retained earnings) 0 0 0.00%

Weighted average cost of

capital (Ka) 0.00%

Question 7: Hitech Company's capital structure is as follows:

Debt 25% Preferred stock 20 Common equity 55% The aftertax cost of debt is 7%; the cost of preferred stock is 12 percent; and the cost of common equity (in the form of retained earnings) is 14 percent. Calculate Hitech Company's weighted average cost of capital in a manner similar to Q6