Suppose a dividend of $1.25 was paid. The stock has a required rate of return of
ID: 2706144 • Letter: S
Question
Suppose a dividend of $1.25 was paid. The stock has a required rate of return of 11.2% and investors expect the dividend to grow at a constant rate of 10%. Complete parts (a) through (e) below.
a) Compute D0, D1, D2, D3 and D7.
b) Compute the present value of the dividends for t = 3 years.
c) Compute the current market price.
d) Assume that the constant growth rate is actually 0%. What is the current market price?
Suppose a dividend of $1.25 was paid. The stock has a required rate of return of 11.2% and investors expect the dividend to grow at a constant rate of 10%. Complete parts (a) through (e) below. Compute D0, D1, D2, D3 and D7. Compute the present value of the dividends for t = 3 years. Compute the current market price. Assume that the constant growth rate is actually 0%. What is the current market price? Describe the behavior of the present value of each future dividend (i.e. the behavior as t increases).Explanation / Answer
(a)
D0= $1.25
D1= 1.25x1.1= $ 1.375
D2= 1.25x1.1^2= $ 1.5125
D3= 1.25x1.1^3= $ 1.664
D7= 1.25x1.1^7= $ 2.436
(b) PV of the dividends for t = 3 years= (1.375/1.112)+(1.5125/1.112^2) + (1.664/1.112^3)= $3.67
(c) current market price= D1/(Ke-g)
= 1.375/(.112-.1)= $114.58
(d) current market price= 1.25/.112= $11.161
As T increases the present value of each future dividend also increases.
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