Assignment No.

2 STOCK VALUATION

1. The Bulldog Company paid $1.5 of dividends this year. If its dividends are expected to grow
at a rate of 3 percent per year, what is the expected dividend per share for Bulldog five years
from today?

2. The current price of XYZ stock is $25 per share. If XYZ’s current dividend is $1 per share and
investors’ required rate of return is 10 percent, what is the expected growth rate of dividends for
XYZ, based on the constant growth dividend valuation model?

3. Given the following data, what should the price of the stock be? Required return: 10% Present
dividend: $1 Dividend growth rate: 5%

4. Identify the relation between a stock’s price and the factors that determine the price, based on
the constant-growth dividend valuation model: Factor Relationship with share price Positive or
Negative Current dividend Expected growth rate of dividends Required rate of return For
example, the relationship is positive if an increase in the factor results in an increase in the share
price.

5. An investor requires a return of 12 percent. A stock sells for $18, it pays a dividend of $1, and
the dividends compound annually at 6 percent. What should the price of the stock be?

6. The annual risk-free rate of return is 7 percent and the investor believes that the market will
rise annually at 13 percent. If a stock has a beta coefficient of 1.3 and its current dividend is $1,
what is the required rate of turn for this stock? What should be the value of the stock if its
earnings and dividends are growing annually at 5 percent?

7. You are considering a stock A that pays a dividend of $1. The beta coefficient of A is 1.3. The
risk free return is 6%, while the market average return is 13%.

a. What is the required return for Stock A?

b. If A is selling for $10 a share, is it a good buy if you expect earnings and dividends to grow at
6%?