Reference no: EM132719611

Part 1

1. Aunt Kathleen owns 3000 preferred shares of ABC Inc., and she is thinking of selling 100 of these shares to pay for a new computer. These shares pay a stable quarterly dividend of $0.65 per share (i.e., there will be four dividend payments in a year, and each payment is $0.65 per share). Aunt Kathleen's required return is 12% APR compounded semi-annually.

a) What is the effective annual return (EAR) based on an APR of 12% compounded semi-annually?

b) What is the effective return per dividend payment period for Aunt Kathleen?

c) What is the estimated stock price based on the Constant Dividend model?

d) What is the maximum amount of money that Aunt Kathleen can spend on the new computer if she only uses the receipts from the sale of 100 shares of ABC's preferred shares to pay for it?

2. GeoTech Company will be holding an IPO of two million shares tomorrow. Market expectations are high for this IPO. The company is expected to pay $1.00 per share starting one year from now. The dividends are then expected to grow at a supernormal rate of 25% for three years, before dropping down to 15% for three more years, and then to 7% afterwards. The 7% growth is then expected to continue for the foreseeable future. What is the gross dollar amount that will be raised from this IPO if the required return for similar issues is 16%? Hint: The first dividend is $1.00.

Part 2 - Answer the Multiple choice:

3. The quantity 1/(1+r)^t is

a) The future value interest factor

b) The present value interest factor

c) The discount factor

d) The present value annuity factor

e) Both b and c

4. Peter wants to buy a tablet computer with a cost of $2000. If Peter invested $1500 today in a stock that returns an average annual rate of 8%, how long will Peter have to wait before he has enough money to buy the tablet computer?

a) Two years and eight months

b) Two years and nine months

c) Three years and seven months

d) Three years and eight months

e) Three years and nine months

5. Julie has a 10 year mortgage of $350,000 with an interest rate of 4.5% APR, compounded semi-annually. Mortgage payments are made at the beginning of each month. What is the monthly mortgage payment?

a) $3606.93

b) $3620.33

c) $4927.58

d) $4941.91

e) $221962.27