1.You are considering the purchase of a stock that is currently selling at $64 per share. You expect the stock to pay $4.5 in dividends next year.
a. If dividends are expected to grow at a constant rate of 3 percent per year, what is your expected rate of return on this stock?
b. If dividends are expected to grow at a constant rate of 5 percent per year, what is your expected rate of return on this stock?
c. What do your answers to part (a) and part (b) indicate about the impact of dividend growth rates on expected rate of returns on stocks?
2.Icy Candy announces a 1 for 8 bonus issues. Icing Candy shares are trading at $9.00 before the bonus issue.
a. Calculate the theoretical price of Icing Candy’s shares immediately after the bonus issue.
b. Casper has 1,000 shares in Icy Candy before Icing Candy announced the 1 for 8 bonus issue.
i. How many bonus shares will Casper entitle to?
ii. Find the value of Casper’s stockholding in Icy Candy before and
after the bonus issue.
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