Practice Problems Set 3 - Financial Economics | ECN 134, Assignments of Economics

Download Practice Problems Set 3 - Financial Economics | ECN 134 and more Assignments Economics in PDF only on Docsity! Practice Problem Set 3 1. Consider the stock of Harley Davidson Company that will pay an annual dividend of $2 in the coming year. The dividend is expected to grow at a constant rate of 5% permanently. The market requires a 12% return on the company. (a) What is the current price of a share of Harley Davidson? (b) What will the stock price be 10 years from today? 2. You have successfully launched an adult web cam service called “ICU” and are planning to take your company public. You expect the firm’s earnings and dividends to grow by 25% annually for the next 6 years as you establish your dominance in the adult video industry, and to grow at a constant 8% per year thereafter. The required rate of return on your company is 15%. Additionally, suppose that the next annual dividend of $10 per share will be paid exactly one year from today. What is the price of a share of ICU? 3. Facebook is experiencing a period of rapid growth. Earnings and dividends per share are expected to grow at a rate of 18% during the next 2 years, 15% in the third year, and a constant rate of 6% thereafter. Facebook’s last dividend, which has just been paid was $1.15. If the required rate of return on the stock is 12%, what is the price of a share of the stock today? 4. Vons Supermarkets has just reported earnings of $10 million, and it plans to retain 75% of its earnings. The company has 1.25 million shares of common stock outstanding. The stock is selling at $30. The historical return on equity (ROE) of 12% is expected to continue in the future. What is the required rate of return on the stock?