Question 20 A stock just paid a dividend of D 0 = $1.50. The required rate of re

Question

Question 20

A stock just paid a dividend of D0 = $1.50. The required rate of return is rs = 10.1%, and the constant growth rate is g = 4.0%. What is the current stock price? Answer $23.11 $23.70 $24.31 $24.93 $25.57

Explanation / Answer

16) P(0) = D1/(k-g) = D(0)*(1+g)/(k-g) = 1.5*1.04/(0.101 - 0.04) = 25.57 ($) (ANSWER) 17) P(0) = D1/(k-g) => D1 = P(0)*(k-g) = 35.5*(0.09-0.055) = 1.245 ($) D4 = D1*(1+g)^3 = 1.245*1.04^3 =1.4 ($) P3 = D4/(k-g) = 1.4/(0.09 - 0.055) = 40 ($) THE NEAREST ANSWER IS 40.85 ($) 18) P(0) = D1/(k - g) => 56 = 1.5/(k - g) =>(k - g) = 1.5/56 = 0.027 => k = 0.027 + 0.065 = 0.092 = 9.2% P1 = D2/(k-g) = 1.5*1.065/0.027 = 59.17 ($) P2 = D3/(k-g) = 1.5*1.065^2/0.027 = 63 capital gain = P1 - P(0) = 63 -59.17 = 3.83 ($) capital gain yield = 3.83/59.17 *100 = 6.47 % = 6.55 approx. (ANSWER) 19) D1 = P(0)*0.06 = P(0)*(k-g) => k-g = 0.06, g = 0.11-0.06 and P(0) = 1.6/0.06 =26.7 ($) P7 = D8/(k-g) => = 1.6*1.05^7/0.06 = 37.52 ($) (ANSWER) 20) P(0) = D1/(1+k) + D2/(1+k)^2 + P2/(1+k)^2 => = 1.32*1.3/1.09 + 1.32*1.3*1.1/1.09^2 + (1.32*1.3*1.1*1.05/0.04)/1.09^2 (since P2 = D3/(k-g) ) => = 44.87 ($) (ANSWER)

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