1.) Red, Inc., Yellow Corp., and Blue Company each will pay a dividend of $2.86
ID: 1175171 • Letter: 1
Question
1.)
Red, Inc., Yellow Corp., and Blue Company each will pay a dividend of $2.86 next year. The growth rate in dividends for all three companies is 5%. The required rate of return for each company's stock is 8%, 11% and 14%, respectively. What is the stock price for each company? What do you conclude about the relationship between the required return and stock price?
Stock price is =
Red, Inc., Yellow Corp., and Blue Company each will pay a dividend of $2.86 next year. The growth rate in dividends for all three companies is 5%. The required rate of return for each company's stock is 8%, 11% and 14%, respectively. What is the stock price for each company? What do you conclude about the relationship between the required return and stock price?
Use the constant dividend growth model , which is: Pt = Dt(1 + g)/(R – g) Red Inc. Stock Price: Yellow Corp. Stock Price: Blue Company Stock Price: What do you conclude about the relationship between the required return and stock price? 2.) Suppose a company currently pays an annual dividend of $2.96 on its common stock in a single installment, and management plans on raising this dividend by 4% per year indefinitely. If the required rate of return on this stock is 11%, what is the current share price? Use the constant dividend growth model , which is: Pt = Dt(1 + g)/(R – g)Stock price is =
3.) The next dividend payment by Grenier, Inc. will be $2.14 per share next year. The dividends are anticipated to maintain a growth rate of 4.4% forever. If the stock currently sells for $32 per share, what is the required return?Explanation / Answer
As per chegg guidelines when there are more than one question then we have to answer first question. 1)Calculation of price of Red Inc: D1= $2.86 Growth= 5% Required return= 8% Price= D1/(required return-growth) = 2.86/(0.08-0.05)= 2.86/0.03= $95.33 Price of Red Inc is $95.33 Calculation of price of Yellow Corp: D1= $2.86 Growth= 5% Required return= 11% Price= D1/(required return-growth) = 2.86/(0.11-0.05)= 2.86/0.06= $47.67 Price of Yellow Corp is $47.67 Calculation of price of Blue Company: D1= $2.86 Growth= 5% Required return= 14% Price= D1/(required return-growth) = 2.86/(0.14-0.05)= 2.86/0.09= $31.78 Price of Blue Company is $31.78 As the required return increases, the price of stock decreases. Wheeas when the required return decreases, then the price of stock increases. So stock price and required return has inverse relation
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