83 Review Problems

Chapter 8 Review Problems

1. Today, Sysco Enterprises paid dividends on its common stock of $1.25 per share. If dividends per share are expected to increase to $3.50 per share six years from now, what is the percentage dividend growth rate?

2. Let’s say you want to purchase shares of Fontaine Ltd. and then hold this stock for six years. The company has a stated dividend policy of $2.00 annually per share for the next six years, at the end of which time you will sell the stock. You expect to be able to sell the stock for $35.00 at that time. If you want to earn an 8% return on this investment, what price should you pay today for this stock?

3. Damian Painting Systems has established a dividend policy of $3.00 per share per year. If the company plans to be in business forever, what is the value of this stock if an investor wants a 10% return?

4. Wilk Productions wants its shareholders to earn a 12% return on their investment in the company. At what value would Wilk stock be priced if the company paid $2.75 per share in constant annual dividends forever?

5. Dax Industrial Systems has stock currently priced at $50.00 per share. If investors are earning a 7% return on Dax Industrial, what is the company’s annual dividend payment per share?

6. If a stock is selling at $400 with a current dividend of $40 and a potential investor’s required rate of return is 15%, what would be the anticipated dividend growth rate?

7. Mind Max Inc. has a dividend policy that increases annual dividends by 3% each year. If last year’s dividend was $2.00, the company intends to stay in business for 50 years, and an investor wants a 9% return, what would be the price of Mind Max stock?

8. Odon Corp. paid dividends today in the amount of $1.50 per share. If Odon will pay dividends of $5.00 10 years from today, what is the annual dividend growth rate over this 10-year period?

9. The Kirkson Distributors common stock is currently selling at $52.00 per share, pays dividends annually at $2.50 per share, and has an annual dividend growth rate of 2%. What is the required return?

10. If a preferred share of stock pays dividends of $2.50 per year and the required rate of return for the stock is 6%, what is its intrinsic value?