FIN 220 Major 2 solutions
20 Pharmacy made two announcements concerning their common stock today. First,
the company announced the next annual dividend will be $1.48 a share. Secondly, all
dividends after that will increase by 2.5 percent annually. What is the maximum
amount you should pay to purchase a share of this stock if your goal is to earn a 12
percent rate of return?
[Link] much are you willing to pay for one share of Delphia stock if the company
just paid a $1.34 annual dividend, the dividends increase by 2.8 percent annually,
and you require a 14 percent rate of return?
[Link] Good Life offers a common stock that pays an annual dividend of $2 a share.
The company has promised to maintain a constant dividend. How much are you
willing to pay for one share of this stock if you want to earn a 9 percent return on your
equity investments?
[Link] common stock of BJ's Auto Clinic sells for $38.25 a share. The stock is
expected to pay $1.90 per share next month when the annual dividend is distributed.
BJ's has established a pattern of increasing their dividends by 2.5 percent annually
and expects to continue doing so. What is the market rate of return on this stock?
[Link] Interiors has net income of $248,000. The firm has decided to pay
$160,000 of that income out to the shareholders. What is the firm's retention ratio?
Retention ratio = ($248,000 - $160,000)/$248,000 = .355
[Link] Adventures will pay an annual dividend of $3.15 a share on their common
stock next week. Last year, the company paid a dividend of $3.00 a share. The
company adheres to a constant rate of growth dividend policy. What will one share of
this common stock be worth ten years from now if the applicable discount rate is 12.5
percent?
[Link] Sounds is expecting a period of intense growth and has decided to retain
more of their earnings to help finance that growth. As a result, they are going to
reduce the annual dividend by 20 percent a year for the next three years. After that
they will maintain a constant dividend of $1 a share. Last year, the company paid
$2.25 as the annual dividend per share. What is the market value of this stock if the
required rate of return is 16 percent?
[Link] Corporation reported net income of $55 million for last year. Depreciation
expense totaled $20 million and capital expenditures came to $5 million. Free cash
flow is expected to grow at a rate of 4.5% for the foreseeable future. Lantern faces a
40% tax rate and has a 0.45 debt to equity ratio with $185 million (market value) in
debt outstanding. Lantern's equity beta is 1.3, the risk-free rate is currently 5% and
the market risk premium is estimated to be 6.5%. What is the current total value of
Lantern's equity (in millions)?
[Link] Grand Isle has 12,000 shares of stock outstanding at a market price of
$31.60 per share. The book value per share is $12.08. The firm has earnings per
share of $1.86 and a dividend payout ratio of .40. What is the firm's sustainable rate
of growth?
Sustainable growth rate = ($1.86/$12.08) (1 - .40) = 9.24 percent
