1. Home Appliances, Inc. will pay a quarterly dividend per share of $.0.50 at the end of each of the next 8 quarters. Thereafter, the dividend will grow at a quarterly rate of 1 percent, forever. The appropriate rate of return on the stock is 9 percent, compounded quarterly. What is the current stock price? (Hint: rate of return is quoted in nominal term, i.e., per year)
a. $50.26
b. $44.19
c. $34.56
d. $37.44
e. $41.02
2. Concord Company earned $25 million for the fiscal year ending yesterday. The firm also paid out 50 percent of its earnings as dividends yesterday. The firm will continue to pay out 50 percent of its earnings as annual, end-of-year dividends. The remaining 50 percent of earnings is retained by the company for use in projects. The company has 2 million shares of common stock outstanding. The current stock price is $60. The historical return on equity (ROE) of 14 percent is expected to continue in the future. What is the required rate of return on the stock? (Hint: use the retention ratio and ROE to estimate the growth rate)
a. 19.16%
b. 18.15%
c. 17.64%
d. 18.77%
e. 17.95%
3. Vitamin World wants to have a weighted average cost of capital of 8%. The firm has an after-tax cost of debt of 5% and a cost of equity of 11%. What debt-equity ratio is needed for the firm to achieve its targeted weighted average cost of capital?
a. 1.00
b. 1.50
c. 1.80
d. 1.20
e. 1.40