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Stock - Practice Questions
Stock - Practice Questions
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. Consider each of the following stocks, and solve for the missing element:
4. 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?
5. Given the following data, what should the price of the stock be?
Present dividend: $1
6. 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%.
b. If A is selling for $10 a share, is it a good buy if you expect earnings and dividends to grow at 6%?
7. Philburn, Inc. does not plan to pay a dividend for the next 4 years (that is, D1 = D2 = D3 = D4 = 0). In
year 5, however, Philburn plans to pay a dividend of $2.50 per share (i.e., D5 = 2.50) and from that point
forward, all future dividends are expected to grow at a constant annual rate of 3.5% per year forever. If
the required rate of return for Philburn, Inc. stock is 11.5%, what is the current equilibrium price of the
stock?
8. A stock has a beta of 1.2. The market risk premium is 6%. The return on the risk-free asset is 2%. If the
most recent dividend (Do) was $1.00 and if future dividends are expected to grow at a constant rate of
2% per year in perpetuity, what is the current equilibrium price of this stock?