I am stock solving this problem, can someone help me with the answers please....
ID: 2645137 • Letter: I
Question
I am stock solving this problem, can someone help me with the answers please....
Imagine that a company just paid a dividend of $4 and that the dividend is expected to grow indefinitely at a rate of 6% per year. The required return is 11%.
1) What is the intrinsic value of one share of this business today?
A$88.75
B$84.80
C$80.00
D$36.36
2) What should be the value of one share of this business one year from today?
A$89.89
B$84.80
C$94.08
D$89.04
3) At what rate did the share price grow over the year?
A5%
B11%
C6%
D0%
Explanation / Answer
Answer1 = the intrinsic value is arrived at by dividing Dividend with the difference between Growth rate and required rate of return
Ie., 4/ 11%-6% = 80 answer is C
Answer2 The growth rate at which dividend is growing is 6% and second year the dividend will be 4+ 6% = 4.24
The value will be 4.24/11%- 6% = 84.80 answer is B
Answer 3 - The denominator is constantly going up by 5% (11% - 6%). So the answer is 5% which is A
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