Q 1. A company currently pays a dividend of $3.5 per share, D0 = 3.5. It is estimated that the company's dividend will grow at a rate of 23% percent per year for the next 2 years, then the dividend will grow at a constant rate of 7% thereafter. The company's stock has a beta equal to 1.6, the risk-free rate is 5.5 percent, and the market risk premium is 4 percent. What is your estimate is the stock's current price? Round your answer to the nearest cent.

Q 2. A stock is trading at $75 per share. The stock is expected to have a year-end dividend of $2 per share (D1 = 2), and it is expected to grow at some constant rate g throughout time. The stock's required rate of return is 16 percent. If markets are efficient, what is your forecast of g? Round the answer to the nearest hundredth.

Q 3. You are considering an investment in Crisp's Cookware's common stock. The stock is expected to pay a dividend of $3 a share at the end of the year (D1 = $3.00); its beta is 0.75; the risk-free rate is 5.7 %; and the market risk premium is 5%. The dividend is expected to grow at some constant rate g, the stock currently sells for $31 a share. Assuming the market is in equilibrium, what does the market believe will be the stock price at the end of 3 years (i.e.,what is P3)? Round your answer to the nearest cent.

Q 4. The beta coefficient for Stock C is bC = 0.7, and that for Stock D is bD = - 0.5. (Stock D's beta is negative, indicating that its rate of return rises whenever returns on most other stocks fall. There are very few negative-beta stocks, although collection agency and gold mining stocks are sometimes cited as examples.)

If the risk-free rate is 9%and the expected rate of return on an average stock is 14%, what are the required rates of return on Stocks C and D? Round the answers to two decimal places.
rC = __%
rD = __%
For Stock C, suppose the current price, P0, is $25; the next expected dividend, D1, is $1.50; and the stock's expected constant growth rate is 4%. Is the stock in equilibrium? Explain, and describe what would happen if the stock is not in equilibrium.

Q 5. Investors require a 17% rate of return on Brooks Sisters' stock (rs = 17%).

A. What would the value of Brooks's stock be if the previous dividend was D0 = $1.75 and if investors expect dividends to grow at a constant compound annual rate of (1) - 4%, (2) 0%, (3) 6%, or (4) 10%? Round your answers to the nearest cent.
1. ___$

2. ___$

3. ___$

4. ___$

B. Using data from part A (Above), what is the Gordon (constant growth) model's value for Brooks Sisters's stock if the required rate of return is 17% and the expected growth rate is (1) 17% or (2) 23%? Are these reasonable results? Explain.

C. Is it reasonable to expect that a constant growth stock would have g > rs?

Q 6. The risk-free rate of return, rRF , is 9%; the required rate of return on the market, rM, 14%; and Schuler Company's stock has a beta coefficient of 1.4.
A. If the dividend expected during the coming year, D1, is $1.50, and if g is a constant 3%, then at what price should Schuler's stock sell? Round your answer to the nearest cent. $ ___
B. Now, suppose the Federal Reserve Board increases the money supply, causing a fall in the risk-free rate to 3% and rM to 13%. How would this affect the price of the stock? Round your answer to the nearest cent. $__
C. In addition to the change in part b, suppose investors' risk aversion declines; this fact, combined with the decline in rRF, causes rM to fall to 10%. At what price would Schuler's stock sell? Round your answer to the nearest cent. $__
D. Suppose Schuler has a change in management. The new group institutes policies that increase the expected constant growth rate to 6%. Also, the new management stabilizes sales and profits, and thus causes the beta coefficient to decline from 1.4 to 1.1. Assume that rRF and rM are equal to the values in part c. After all these changes, what is Schuler's new equilibrium price? (Note: D1 goes to $1.54.) Round your answer to the nearest cent.

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