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1)Kinston Nielson Motors has a share price of $25 today
1)Kinston Nielson Motors has a share price of $25 today. If Nielson Motors is expected to pay a dividend of $0.75 this year, and its stock price is expected to grow to $26.75 at the end of the year, then Nielson's dividend yield and equity cost of capital are:
| a. |
3.0% and 7.0% respectively. |
|
| b. |
4.0% and 6.0% respectively. |
|
| c. |
3.0% and 10.0% respectively. |
|
| d. |
None of the answers are correct. |
|
| e. |
4.0% and 10.0% respectively. |
2)A company is growing at a constant rate of 8 percent. Last week it paid a dividend of $3.00. If the required rate of return is 15 percent, what is the price of the share three years from now?
| a. |
$42.83. |
|
| b. |
$46.29. |
|
| c. |
$58.31. |
|
| d. |
$51.02. |
|
| e. |
$48.30. |
Expert Solution
1)Dividend Yield = Current Year Dividend/Current Market Price = 0.75/25 = 3%
Growth rate = (26.75 - 25)/25 = 7%
Current Market Price by end of year = Future Dividend / ( equity cost of capital - growth)
=> 26.75 = 0.75*1.07/(cost of capital - 0.07)
=> Cost of capital = 10%
So the answer is option c
2)D0 = $3.00
D4 = 3.00(1.08)4 = $4.08
Stock Price in Year 3 = D4/(r - g)
Stock Price in year 3 = 4.08/(0.15 - 0.08)
Stock Price in Year 3 = $58.31
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