1. A price-weighted index consists of stocks X, Y, and Z which are priced at $42, $21, and $49 a share, respectively. The current index divisor is 2.5. What will the new index divisor be if stock Y undergoes a 2-for-1 stock split?
2. A stock sells for $14.85 a share and has a required return of 14 percent. Dividends are paid annually and increase at a constant 3 percent per year. What is the amount of the last dividend paid according to the DDM?
3. Compare the dividend discount model, the residual income model, and the free cash flow model. When might you want to use each one?