Question 1. The Club Auto Parts Company has just recently been organized. It is expected to experience no growth for the next 2 years as it identifies its market and acquires its inventory. However, Club will grow at an annual rate of 5% in the third year and, beginning with the fourth year, should attain a 10% growth rate that it will sustain thereafter. The first divident to be paid at the end of the first year is expected to be $0.50 per share. Investors require a 15% rate of return on Club's stock. What is the current equilibrium stock price?
Question 2. Johnson Corporation's stock is currently selling at $45.83 per share. The last dividend paid was $2.50. Johnson is a constant growth firm. If investors require a return of 16% on Johnson's stock, what do they think Johnson's growth rate will be?
Question 3. Assume that the average firm in your company's industry is expected to grow at a constant rate of 7% and its dividend yield is 8%. Your company is about as risky as the average firm in the industry, but it has just successfully completed some R&D work that leads you to expect you to expect that its earnings and dividends will grow at a rate of 40% this year and 20% the following year, after which growth should match the 7% industry average rate. The last dividend paid was $1. What is the current value per share of your firm's stock?
Question 4. Hanebury Manufacturing Company has preferred stock outstanding with a par value of $50. The stock pays a quarterly dividend of $1.25 and has a current price of $71.43. What is the nominal rate of return on the preferred stock?