1. Company ABC paid a dividend of $1.40 recently. Dividend growth is expected to
ID: 1172737 • Letter: 1
Question
1. Company ABC paid a dividend of $1.40 recently. Dividend growth is expected to be 8%. What should be the price of the stock if the required rate of return is 12%?
$30.00
$32.60
$35.00
$37.80
1. Company XYZ expected to pay a dividend of $3.00 next year. Dividend growth is expected to be 6%. What should be the price of the stock today and five years from today? The required rate of return is 10%.
$75 and $106.39
$75.00 and $100.37
$79.50 and $106.39
$79.50 and $112.77
1. A company paid a dividend of $2.50 and expects to increase dividends by 15% for the next three years before leveling off at 5%.What should be the price of the stock if the required rate of return is 16%?
$34.42
$30.67
36.67
$48.86
1. Company ABC paid a dividend of $1.40 recently. Dividend growth is expected to be 8%. What should be the price of the stock if the required rate of return is 12%?
$30.00
$32.60
$35.00
$37.80
Explanation / Answer
1.Current price=D1/(Required return-Growth rate)
=(1.4*1.08)/(0.12-0.08)
=$37.80
2.
Current price=D1/(Required return-Growth rate)
=3/(0.1-0.06)
=$75
We use the formula:
A=P(1+r/100)^n
where
A=future value
P=present value
r=rate of interest
n=time period.
P5=$75*(1.06)^5
=$75*1.338225578
=$100.37(Approx).
Hence the correct option is B.
3.
D1=(2.5*1.15)=$2.875
D2=(2.875*1.15)=$3.30625
D3=(3.30625*1.15)=$3.8021875
Value after year 3=(D3*Growth rate)/(Required return-Growth rate)
=(3.8021875*1.05)/(0.16-0.05)
=$36.29360795
Hence price of the stock=Future dividends*Present value of discounting factor(16%,time period)
=$2.875/1.16+$3.30625/1.16^2+$3.8021875/1.16^3+$36.29360795/1.16^3
which is equal to
=$30.67(Approx).
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