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An investor buys 100 shares of a $40 stock that pays an annual cash dividend of $2 a share.

a) 5 percent dividend yield) and signs up for the dividend reinvestment plan.a)If neither the dividend nor the price changes, how many shares will the investor have at the end of ten years? How much will the position in the stock be worth?

b) If the price of the stock rises by 6 percent annually but the dividend remains at $2 a share, how many shares are purchased each year for the next ten years? How much is the total position worth at the end of ten years?

c) If the price of the stock rises by 6 percent annually but the dividend rises by only 3 percent annually, how many shares are purchased each year for the next ten years? How much is the total position worth at the end of ten years? Since dividend plans credit fractional shares, use three decimal places in parts (b) and (c).

A firm with sales of $500,000 has average inventory of $200,000. The industry aver-age for inventory turnover is four times a year. What would be the reduction in inventory if this firm were to achieve a turnover comparable to the industry average?

Two firms have sales of $1 million each. Other financial information is as follows:

Firm A Firm B

EBIT $150,000 $150,000

Interest expense 20,000 75,000

Income tax 50,000 30,000

Equity 300,000 100,000

What are the operating profit margins and the net profit margins for these two firms? What is their return on equity? Why are they different? If total assets are the same for each firm, what can you conclude about their respective uses of debt financing?

A firm’s stock earns $2 per share, and the firm distributes 40 percent of its earnings as cash dividends. Its dividends grow annually at 4 percent.

5. You are offered two stocks. The beta of A is 1.4 while the beta of B is 0.8. The growth rates of earnings and dividends are 10 percent and 5 percent, respectively. The dividend yields are 5 percent and 7 percent, respectively.

a) Since A offers higher potential growth, should it be purchased?

b Since B offers a higher dividend yield, should it be purchased?

c) If the risk-free rate of return were 7 percent and the return on the market is expected to be 14 percent, which of these stocks should be bought?