Please answer the 2 questions below: Precision Machining?s last annual dividend

Question

Please answer the 2 questions below:

Precision Machining?s last annual dividend was $80 a share. The firm will increase the dividend by 8 percent for the next 2 years and thereafter increase the dividend by 3 percent annually. What is this stock worth today if the required return is 9 percent? 1. $17.08 2. $16.97 3. $15.30 4. $15.06 5. $14.52 Question 6 If the stock market is efficient, then stocks with similar risks will: 1.have similar rates of return. 2. produce excess returns. 3 produce abnormal returns. 4. be priced similarly. 5. pay similar dividends.

Explanation / Answer

1)

have similar rate of returns

2)

step1:

calculate dividends

Dividend in year 1 = 0.8 * 1.08 = 0.864

Dividend in year 2 = 0.8 * 1.08^2 = 0.93312

Dividend in year 3 = 0.8 * 1.08^2 * 1.03= 0.9611136

step2:

calculate price in year 3:

price = D3/r-g

= 0.9611136/(9%-3%)

= 16.01856

step3:

calculate current price

current price

= 0.864/1.09 + 0.93312/1.09^2 + 16.01856/1.09^2

= $15.06

hence 4 is the correct choice

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