Answer both questions correctly. Show all work. What constant growth rate in div

Question

Answer both questions correctly. Show all work.

What constant growth rate in dividends is expected for a stock valued at $32.00 if next year's dividend is forecast at $2.00 and the appropriate discount rate is 12.5%? `
A. 5.00%
B. 6.25%
C. 6.75%
D. 15.38%

Gentleman Gym just paid its annual dividend of $3 per share, and it is widely expected that the dividend will increase by 5 percent per year indefinitely. If the discount rate is 15%, what should be fair price of its stock?A.$15

B.$20

C.$31.5

D.$48.3

Explanation / Answer

1. Stock price = Dividend next year / (Discount rate - Growth rate)

=> $32.00 = $2.00 / (12.5% - Growth rate)

=> Growth rate = 6.25%

Therefore, option (B)

2. Stock price = Dividend just paid * (1 + growth rate) / (Discount rate - Growth rate)

= $3.00 * (1 + 5%) / (15% - 5%)

= $31.50

Therefore, option (C)

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