A stock you are evaluating just paid an annual dividend of $2.50. Dividends have

Question

A stock you are evaluating just paid an annual dividend of $2.50. Dividends have grown at a constant rate of 2 percent over the last 15 years and you expect this to continue.

If the required rate of return on the stock is 12.6 percent, what is its fair present value? (Do not round intermediate calculations. Round your answer to 2 decimal places. (e.g., 32.16))

If the required rate of return on the stock is 15.6 percent, what should the fair value be four years from today? (Do not round intermediate calculations. Round your answer to 2 decimal places. (e.g., 32.16))

A stock you are evaluating just paid an annual dividend of $2.50. Dividends have grown at a constant rate of 2 percent over the last 15 years and you expect this to continue.

Explanation / Answer

Hi,

Please find the detailed answer as follows:

Part A:

Expected Present Value = D1/(ke - g) = 2.50*(1+.02)/(.126 - .02) = $24.06

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Part B:

Expected Present Value (Today) = D1/(ke - g) = 2.50*(1+.02)/(.156 - .02) = 18.75

Fair Value (4 Years from Now) = 18.75*(1+.02)^4 = $20.30

Thanks.

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