Problem 1 Tony's Den retains 70% of its earnings each year. For the year just ended, the company had return on equity of 7%. The company has a policy of increasing the dividend by the same percentage each year. It just paid a $2.20 annual dividend. If required rate of return for this type of firms is 10%, what will be the price of this company's share in two years?
Problem 2 Fun Inc. is considering some strategies for expansion as shown below. In order to fund the expansion, the company does not expect to pay any dividends for the next three years. It is considering the following 2 options for the expansion. The third option is to not expand. Option #1: If they select this option, the management believes that they will pay a smaller dividend of $2.25 at the end of year 4 for 3 years. The management predicts this option would then allow the dividends to grow at a rate of 8% forever. Investors' required return for this option would be 13%. 2 Option #2: If they select this option, the management expects to begin to pay dividends of $3.05 at the end of year 4 and they expect that dividends will grow at a rate of 3% forever. Based on the risk assessment of this project, investors will require a rate of return of 11%. Option #3: Dividends would continue uninterrupted. The last dividend paid was $2.10, with growth expected of 2.75% forever. Investors currently require a return of 11.5%. As a shareholder, which option would you prefer? Please note that share holders' assessment is based on share values.
Problem 3 A company has preferred shares, which pays $2 every year as dividend. If the required rate of return for shares of this kind is 8%, what is the current market value of the preferred shares?
Problem 4 Barrow Inc.'s rate of return for the last year was 12.6%. The dividend paid at the end of the year was $1.10 a share, which equated to a dividend yield of 2.2%. What was the stock price for the share at the beginning of the year?