Common stock value-constant growth. McCracken company common stock paid a dividend of $1.20 per share last year. The company expects earnings and dividends to grow at a rate of 5% per year for the foreseeable future.

Question
Sock Value, Time Value of Money

  1. Common stock value-zero growth – The company’s class A stock has paid a dividened of $5.00 per share for the last 15 years. Management expects to continue to pay at that rate for the forseeable future . Sally Talbout purchased 100 shares of common stock 10 years ago at a time when the required rate of return for the stock was 16%. She wants to sell her shares today. The current required rate of returnfor the stock is 12%. How much capital or loss will she have on her shares.

  2. Common stock value-constant growth. McCracken company common stock paid a dividend of $1.20 per share last year. The company expects earnings and dividends to grow at a rate of 5% per year for the forseeable future.

a. What required rate of return for this stock would result in a price per share of $28?

b. If McCracken had both earnings and growth and dividened at a rate of 10% what required rate of return would result in a price per share of 28?

  1. Time Value – Your rich uncle offers you a choice of one of the three following alternatives. Assume that all present day investments can obtain a return or 8% compounded semi-annually.

a. $200,000 now or

b. $10,000 a year for 30 years

c. $150,000 at the end of 10 years and another $150, 000 at the end of 20 years

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