Sample Problem—Stocks
1. Firm X needs to net $6,500,000 from the sale of common stock. Its investment banker has informed
the firm that the retail price will be $22 per share, and that the firm will receive $19 per share. Out–of–
pocket costs are $100,000. How many shares must be sold?
2. What would you pay for a stock which just paid a $5 dividend if the expected dividend growth rate is
4% and you require a 16% return on your investment?
3. Mack Industries just paid a dividend of $1.00 per share (i.e., D0 = $1.00). Analysts expect the
company’s dividend to grow 20 percent this year, and 15 percent next year. After two years the
dividend is expected to grow at a constant rate of 5 percent. The required rate of return on the
company’s stock is 12 percent. What should be the current price of the company’s stock?
4. ABC Company’s preferred stock is selling for $45 a share. It is expected that the company will always
pay its constant preferred dividend. If the required rate of return is 10%, what will be the dividend two
years from now?
5. The Taussig Company, whose stock price now is $30, needs to raise $15 million in common stock.
The company will price the new issue at $27.53 per share and will net $25.60 per share after
underwriting costs. Taussig will incur additional floatation expenses in the amount of $360,000. How
many shares must Taussig set to net $15
6. Ewald Company just paid a dividend of $0.68. Dividends have been growing at 6 percent and are
expected to continue growing at that rate in the future. If investors require a 14 percent rate of return
on similar investments, determine the present value of the company’s stock.
