Final Exam 07022018 9 Newly issued securities are sold to in

Final Exam (07/02/2018) 9. Newly issued securities are sold to investors in which one of the following markets? A. Proxy B. Stated value C. Inside D. Secondary E. Primary 10. Triad common stock is selling for $27.80 a share and has a dividend yield of 2.8 percent. What is the dividend amount? A. $.31 B. $.78 C. S3.49 D. $4.25 E. $7.80 11. Healthy Foods just paid its annual dividend of S1.62 a share. The firm recently announced that all future dividends will be increased by 2.1 percent annually. What is one share of this stock worth to you if you require a rate of retun of 15.7 percent? A. $11.91 B. $12.95 C. $12.16 D. $10.54 E. S13.07

Solution

9.) Option E. - When securities are sold for the first time, they are always sold in the primary market.

10.) Dividend Yield = Dividend / Price = 0.028

Dividend / 27.80 = 0.028

Dividend = 27.80 x 0.028 = 0.7784

Option B) $0.78

11.) Required Rate of Return (r) = 15.7%

Dividend Growth Rate (g) = 2.1%

Last Dividend (D₀) = $1.62 per share

Dividend after one year (D₁) = D₀ (1 + g) = 1.62 (1.021) = $1.654 per share.

Using Gordon Growth Model,

Price = D₁ / (k - g) = 1.654 / (.157 - .021) = 1.654 / .136 = $12.16

Option C.) $12.16