Fin 12 Final Exam Problem #1 A firm just paid a dividend of $2 and the growth rates are forecasted to be 3% in the first period and then 2% for every period afterwards. The stock has a required rate of return of 12%. Find the dividends payments for periods 1, 2, and 3. Find the price of the stock at time 1. Find the price of the stock at time 0 (today). If the stock is trading for $12.75 would you buy it or want to sell it? Problem #2 Suppose that you have the following information about two assets. A: B: In the context of the relationship between risk and return, what must be true about the expected return for B? Should the expected return for B be higher, lower, or the same as the expected return for A? Problem #3 A firm has 5m shares of common stock outstanding at a market value of $20/share. The last dividend paid was $2 and the growth rate is expected to be 3% indefinitely. The firm has 20,000 bonds outstanding at a market price of $1025. The coupon rate is 5% paid semi-annually and there is 1 year to maturity. If the tax rate is 34%, what is the firm’s weighted average cost of capital? Under what assumption can the WACC be used as the required rate of return for an investment project? Problem #4 What is the objective of the firm? What is your objective in studying business? Are those objectives the same? Explain briefly.
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