Assume IBM is expected to pay a total cash dividend of $3.60 next year Answer
1. Assume IBM is expected to pay a total cash dividend of $3.60 next year and dividends are expected to grow indefinitely by 3 percent a year. Assume the required rate of return (i.e. equity holder’s opportunity cost of capital) is 9 percent. Assuming this is the best information available regarding the future of this firm, what would be the most economically rational value of the stock today (i.e. today’s “price”)? a. 0.60 b. 120.00 c. 60.00 d. 92.70 e. 40.00
2. Someone offers to sell to you a financial contract that will pay $90 at the end of each of the next five years, plus an additional $1000 at the end of the fifth year. If they will sell the contract for $950, what rate of return are they offering on the investment? a. 10.3% b. 7.7% c. 9.6% d. 52.6% ((90*5+1000)/950 -1) e. insufficient information to estimate a return rate
3. The semi-annual interest payments that corporate bonds in the U.S. typically pay are conventionally referred to as a. yield payments b. coupon payments c. call payments d. premium payments e. dividends
4. Assume that the expected future dividends (D) at end of periods 1,2, and 3, as well as the expected future price (P) at end of period 3 for a stock are as follows: D1 = $1.20, D2 = $1.40, D3 = $1.55, and P3 = $80.00. What should be the stock’s expected price today, (i.e. P0 )? I encourage you to draw a time line clearly indicating the situation. Assume the required return is 8.6 percent. a. 87.15 b. 66.96 c. 79.14 d. 65.96 e. 68.40
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