1.) A business paid a dividend last year of $2.6, and its stock is currently tra

Question

1.)

A business paid a dividend last year of $2.6, and its stock is currently trading at $51 a share. If investors require a rate of return of 12.8, what is the implied growth rate for this company? Show your answer as a percentage to two decimal places (if you think the answer is .0793, record it as 7.93).

2.)

A company issued preferred shares two years ago, paying a $3.76 dividend, which offered investors an original yield of 7%. Currently, the required return on companies with preferred shares of comparable risk yield 11%. Given this information, what should these shares be trading for today? Show your answer as a dollar amount, rounded to 1 decimal point.

Explanation / Answer

1) D0 = Last year dividend = $2.6

P = Current market price = $51

Ke = required rate of return = 12.80%

As per dividend discount model

P = D1/Ke-g

$51 = $2.60(1+g)/(0.128-g)

$6.528 - $51g = $2.60 + $2.60g

g = 7.32%

The implied growth rate for the company is 7.32%

2) Dividend = $3.76

Yield = 7%

Required arte of return = 11%

Price of a preference share = Dividend/Kp

Where Kp = Required return

Price = $3.76/0.11

Price = $34.18

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