Question 1: Use the constant-growth model (Gordongrowth model) to find the value of each firm shown in the following table.
Firm Dividend Expected Next Year Divided Growth Rate Required Return
A $1.20 8% 13%
B 4.00 5 15
C 0.65 10 14
D 6.00 8 9
E 2.25 8 20
Question 2: Elk County Telephone has paid the dividends shown in the following table over the past 6 years.
Year Dividend Per Share
2012 $2.87
2011 2.76
2010 2.60
2009 2.46
2008 2.37
2007 2.25
The firm's dividend per share next year is expected to be $3.02.
a. If you can earn 13% on similar-risk investments, what is the most you would be
willing to pay per share?
b. If you can earn only 10% on similar-risk investments, what is the most you
would be willing to pay per share?
Question 3: Given the following information for the stock of Foster Company, calculate the risk premium on its common stock.
Current price per share of common $50.00
Expected dividend per share next year $ 3.00
Constant annual dividend growth rate 9%
Risk-free rate of return 7%
Question 4: Micro-Pub, Inc., is considering the purchase of one of two microfilm cameras, R and S. Both should provide benefits over a 10-year period, and each requires an initial investment of $4,000. Management has constructed the accompanying table of estimates of rates of return and probabilities for pessimistic, most likely, and optimistic results.
a. Determine the range for the rate of return for each of the two cameras.
b. Determine the expected value of return for each camera.