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F. Naz
F. Naz, Chartered Accountant
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3 main questions with some additional questions. Need to have

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3 main questions with some additional questions. Need to have all of the work shown

P1. Given the following data, what should the price of the stock be?

Required return 10%
Present dividend $1
Growth rate 5%

a. If the growth rate increases to 6% and the dividend remains $1, what should the stock’s price be?
b. If the required return declines to 9% and the dividend remains $1, what should the price of the stock be? If the stock is selling for $20, what does that imply?

P4. The annual risk-free rate of return is 9% and the investor believes that the market will rise annually at 15%. If a stock has a beta coefficient of 1.5 and its current dividend is $1, what should the value of the stock if it is earnings and dividends grown annually at 6%

P5. You are considering two stocks. Both pay a dividend of $1, but the beta coefficient of A is 1.5 while the beta coefficient of B is 0.7. Your required return is

k= 8% + (15% - 8%) B.

A. what is the required return for each stock?
B. If A is selling for $10 a share, is it a good buy if you expect earnings and dividends to grow at 5%
C. The earnings and dividends of B are expected to grow annually at 10%. Would you buy the stock for $30?
D. If the earnings and dividends of A were expected to grow annually at 10%, would it be a good buy at $30?
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