1) Far Side Corporation is expected to pay the following dividends over the next
ID: 2613956 • Letter: 1
Question
1) Far Side Corporation is expected to pay the following dividends over the next four years: $14, $10, $8, and $4. Afterward, the company pledges to maintain a constant 5 percent growth rate in dividends forever.
Required: If the required return on the stock is 12 percent, what is the current share price?
2) Marcel Co. is growing quickly. Dividends are expected to grow at a 25 percent rate for the next 3 years, with the growth rate falling off to a constant 7 percent thereafter.
Required: If the required return is 13 percent and the company just paid a $3.50 dividend. what is the current share price?
3) Metroplex Corporation will pay a $5.10 per share dividend next year. The company pledges to increase its dividend by 7.00 percent per year indefinitely.
Required: If you require an 12.20 percent return on your investment, how much will you pay for the company's stock today?
Explanation / Answer
Question 1
Step 1: Computation of market price at the end of year 4 using Gordon Growth Mdel
P4 = D5 / (Ke-g)
= (4*1.05) / (0.12 - 0.05)
= $60
Step 2: Computing current share price by discounting the cashflow at required return
current share price = $66.87 (12.50+7.97+5.70+40.70)
Question 2
Step 1: Computation of market price at the end of year 3 using Gordon Growth Mdel
P3 = D4 / (Ke-g)
= *7.31 / (.13 - .07)
= $121.83
* 7.31 = (3.5 * 1.253 * 1.07)
Step 2: Computing current share price by discounting the cashflow at required return
Current Share Price = $97.33(3.88+4.28+89.17)
Question 3
Using Gordon Growth Model
P0 = D1 / (Ke-g)
Where
D1 - DPS next year
Ke - required return
g - Growth rate in dividend
P0 - Current market price
P0 = D1 / (Ke-g)
= 5.10/ (.122-.07)
= $98.08
Year Dividend PVF@12% Present Value (Cashflow*PVF) 1 14 0.893 12.50 2 10 0.797 7.97 3 8 0.712 5.70 4 64 (4+60) 0.636 40.70Related Questions
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