Suppose you know a company\'s stock currently sells for $50 per share and the re

Question

  

Suppose you know a company's stock currently sells for $50 per share and the required return on the stock is 9 percent. You also know that the total return on the stock is evenly divided between a capital gains yield and a dividend yield.

If it's the company's policy to always maintain a constant growth rate in its dividends, what is the current dividend per share?

4.

Apocalyptica Corp. pays a constant $22 dividend on its stock. The company will maintain this dividend for the next 9 years and will then cease paying dividends forever.

Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on the stock over the next 11 years because the firm needs to plow back its earnings to fuel growth. The company will pay a $12 per share dividend in 12 years and will increase the dividend by 8 percent per year thereafter.

If the required return on this stock is 12 percent, what is the current share price? (Do not round your intermediate calculations.)

6.

Far Side Corporation is expected to pay the following dividends over the next four years: $12, $10, $8, and $4. Afterward, the company pledges to maintain a constant 8 percent growth rate in dividends forever.

If the required return on the stock is 15 percent, what is the current share price? (Do not round your intermediate calculations.)

rev: 09_18_2012

1. The next dividend payment by Hot Wings, Inc., will be $2.25 per share. The dividends are anticipated to maintain a 4 percent growth rate forever.

Explanation / Answer

1. Solution

Price = D1/(r-g)
57 = 2.25/(r-4%)
required return,r= 7.95%

2. Soution-
Price = D1/(r-g)
Price = 5.4/(7.8%-2.9%) =$110.20

3. Solution

Price = D1/(r-g)

Dividend yield =D1/ Price

9%/2 = D1/Price

D1 = 2.25

50 = 2.25/(9%-g)

g= 4.5%

D0 = D1/(1+4.5%)

current dividend per share, D0= $2.15

4. Current share price = 22/1.08 + 22/1.08^2 + 22/1.08^3 + 22/1.08^4 + 22/1.08^5 + 22/1.08^6 + 22/1.08^7 + 22/1.08^8 + 22/1.08^9 =$137.43

5. current share price = (12/(12%-8%))/(1+12%)^11 =$86.24

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