The Bell Weather Co. is a new firm in a rapidly growing industry. The company is

Question

The Bell Weather Co. is a new firm in a rapidly growing industry. The company is planning on increasing its annual dividend by 18 percent a year for the next 4 years and then decreasing the growth rate to 3 percent per year. The company just paid its annual dividend in the amount of $2.50 per share. What is the current value of one share of this stock if the required rate of return is 8.00 percent? $85.93 $73.39 $88.43 $102.35 $99.85 The Red Bud Co. pays a constant dividend of $2.30 a share, The company announced today that it will continue to do this for another 2 years after which time they will discontinue paying dividends permanently. What is one share of this stock worth today if the required rate of return is 7.9 percent? $2.58 $2.48 $4.60 $6.41 $4.11 The Red Bud Co. pays a constant dividend of $2.30 a share, The company announced today that it will continue to do this for another 2 years after which time they will discontinue paying dividends permanently. What is one share of this stock worth today if the required rate of return is 7.9 percent? $2.58 $2.48 $4.60 $6.41 $4.11

Explanation / Answer

1) Stock Price = 2.50*1.054/(9.60%-5.40%)

Stock Price = $ 62.74

2)

Stock Price = 2.30/1.079 + 2.30/1.079^2

Stock Price = $ 4.11

3)

Stock Price = 2.50*1.18/1.08 + 2.50*1.18^2/1.08^2 + 2.50*1.18^3/1.08^3 + 2.50*1.18^4/1.08^4 + (2.50*1.18^4*1.03/(8%-3%))/1.08^4

Stock Price = $ 85.93

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