Problem 1:
China S. Construction, Inc. is in the business of building electrical power plants in the eastern United States. Jack Godell and the rest of the board members of the firm have just announced a $4 per share dividend on the corporation’s common stock to be paid in one year. Because the quality of some of its recent projects is under attack by investigative television reporters, the expected constant dividend growth rate is only estimated to be 1 percent. The required rate of return for similar stocks in this industry is 16 percent.
a. What is the present value of the expected dividends from one share of China S. Construction’s common stock?
b. What is the stock’s dividend yield (D/P)
Problem 2:
The current listed price per share of a certain common stock is $15. The cash dividend expected from this corporation in one year is $2 per share. All market research indicates that the expected constant growth rate in dividends will be 4 percent per year in future years. What is the rate of return on this investment that an investor can expect if share are purchased at the current listed price.