You are considering the purchase of a common stock that paid a dividend of 2.00 yesterday. You
expect this stock to have a growth rate of 15 percent for the next 3 years, resulting in dividends of
D1 = 2.30, D2 = 2.645, and D3 = 3.04.
The long-run normal growth rate after year 3 is expected
to be 10 percent (that is, a constant growth rate after year 3 of 10 per year forever). If you require
a 14 percent rate of return, how much should you be willing to pay for this stock?
A) 89.75 B) 56.46 C) 62.57 D) 83.65
Question 2
JPR Company is financed 75 percent by equity and 25 percent by debt. If the firm expects to earn
30 million in net income next year and retain 40 of it, how large can the capital budget be before
common stock must be sold?
A) 16.0 million B) 15.5 million C) 12.0 million D) 7.5 million
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