solution

1. SOSU, Inc has before tax income this year is $900,000. The company’s payout ratio is 40%. The company’s common equity currently has a book value of $5,000,000. They just paid a dividend of $1.97, and the required rate of return on this stock is 10%. Compute the value of this stock if dividends are expected to continue growing indefinitely at the company’s internal growth rate. Tax rate = 26%.
2. We expect that NA Inc. will pay a dividend of $1.40 per share one year from today, a dividend of $2 per share in years two, and of $3 per share in years three. Assume that the value of the stock at the end of year three to be $12.9. If your required return on NA Inc. stock is 12%, what is the most you would be willing to pay for the stock today if you plan to sell the stock in three years?
3. IMC paid a dividend of $1.60 on its common stock yesterday. The dividends are expected to grow at 6% per year indefinitely. If the 10-year Treasury bond yield is 2.6%, IMC stock beta is 1.3, and market rate of return is 10%, estimate the value of IMC stock 3 years from now.
4. FET’s preferred stock is selling at $54 on the market and pays an annual dividend of $4.20 per share.
   1. What is the expected rate of return on the stock?
   2. If an investor’s required rate of return is 10%, what is the value of the stock to that investor?
   3. Considering the investor’s required rate of return, does this stock seem to be a desirable investment?

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