FUNDAMENTAL OF FINANCIAL MANAGEMENT
Fall 2019
1
TUTORIAL: STOCKS
1. The Jackson–Timberlake Wardrobe Co. just paid a dividend of $1.95 per share on
its stock. The dividends are expected to grow at a constant rate of 6 percent per
year indefinitely. If investors require an 11 percent return on The Jackson–
Timberlake Wardrobe Co. stock, what is the current price? What will the price be in
three years? In 15 years?
2. The next dividend payment by Hot Wings, Inc., will be $2.10 per share. The
dividends are anticipated to maintain a 5 percent growth rate forever. If the stock
currently sells for $48 per share, what is the required return?
3. Teder Corporation stock currently sells for $64 per share. The market requires a 10
percent return on the firm’s stock. If the company maintains a constant 4.5 percent
growth rate in dividends, what was the most recent dividend per share paid on the
stock?
4. Antiques R Us is a mature manufacturing firm. The company just paid a $10.46
dividend, but management expects to reduce the payout by 4 percent per year
indefinitely. If you require an 11.5 percent return on this stock, what will you pay for a
share today?
5. Consider the following three stocks:
a) Stock A is expected to provide a dividend of $10 a share forever.
b) Stock B is expected to pay a dividend of $5 next year. Thereafter, dividend
growth is expected to be 4% a year forever.
c) Stock C is expected to pay a dividend of $5 next year. Thereafter, dividend
growth is expected to be 20% a year for five years (i.e., until year 6) and zero
thereafter.
If the required rate of return for each stock is 10%, which stock is the most valuable?
What if the required rate of return is 7%?
6. Mexican Motors stock sells for 200 pesos per share and next year’s dividend is 8.5
pesos. Security analysts are forecasting earnings growth of 7.5% per year for the
next five years.
a) Assume that earnings and dividends are expected to grow at 7.5% in perpetuity.
What rate of return are investors expecting?
