Question 1

Suppose a stock had an initial price of €84 per share, paid a dividend of €2.05 per share during the
year, and had an ending share price of €97. Compute the

a. Percentage total return.

b. The dividend yields.
c. The capital gains yield?

Question 2
Given that the German Treasury bills yield 4 percent, and a 30-year German Treasury bonds yield 8
percent. The following information is available for LCC and AOC two retail companies.

LCC AOC
Current stock price €40 €20
shares outstanding 8 million 14 million
Projected earnings per share €5 €12.3
Projected dividend per share €0.5 €2.3
Projected dividend growth rate 6% 8%
Stock beta 1.7 1.2
Investor's required return 15% 16%
Long term debt €80 million €120million
Stockholders’ equity €250 million €220 million

a. Calculate the value of the common stock of LCC and AOC using the constant growth DDM.

b. Calculate the expected return over the next year of the common stock of LCC and AOC using the
CAPM.

c. Calculate the internal (implied, normalized, or sustainable) growth rate of LCC and AOC.

d. Recommend LCC or AOC for investment. Justify your choice using your answers to A, B, and C
and the information in Table above.