1.- A stock is expected to pay a dividend of $1 at the end of the year. The requ

Question

1.- A stock is expected to pay a dividend of $1 at the end of the year. The required rate of return is 11%, and the expected growth rate is 5%. What is the current stock price?

2.- A stock just paid a dividend of $1. The required rate of return is 11%, and the growth rate is 5%. What is the current stock price?

3.- Mark Walker Inc. plans to issue preferred stock with a perpetual annual dividend of $1.5 per share and a par value of $20. If the required return on this stock is currently 7%, what should be the stock’s market value?

4.- A share of common stock has just paid a dividend of $2.00. If the expected long-run growth rate for this stock is 7%, and if investors require an 11% rate of return, what is the price of the stock?

Explanation / Answer

Q1 P0 = D1/(ke-g) Where P0 is the price Ke is the required return 11.00% g is the growth rate 5.00% D1 is dividend at end of year 1 P0 = 1/(11%-5%) P0 = 1/(6%) P0 = 16.67 Q2 P0 = D1/(ke-g) Where P0 is the price Ke is the required return 11.00% g is the growth rate 5.00% D1 is dividend at end of year = 1*1.05 1.05 P0 = 1.05/(11%-5%) P0 = 1.05/(6%) P0 = 17.50 Q3 Annual Dividend                   1.50 Required Return 7% Stock Market Value = 1.50/7%                21.43 Q4 P0 = D1/(ke-g) Where P0 is the price Ke is the required return 11.00% g is the growth rate 7.00% D1 is dividend at end of year = 2*1.07 2.14 P0 = 2.14/(11%-7%) P0 = 2.14/(4%) P0 = 53.50

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