3BH2 Part 1 Stock Values [LO1] The next dividend payment by Halestorm, Inc., wil

Question

3BH2

Part 1

Stock Values [LO1] The next dividend payment by Halestorm, Inc., will be $2.04 per share. The dividends are anticipated to maintain a growth rate of 4.5 percent forever. If the stock currently sells for $37 per share, what is the required return?

Part 2

Stock Values [LO1] Caan Corporation will pay a $3.56 per share dividend next year. The company pledges to increase its dividend by 3.75 percent per year indefinitely. If you require a return of 11 percent on your investment, how much will you pay for the company’s stock today?

Please specify between part 1 & 2 thank you!

Explanation / Answer

Answer:

Part 1:

Calculation of Required Return:

Required return=[D1/P0]+g

D1=Dividend paid in next year

g=Growth rate

R=Required return

P0=Current price

=($2.04/$37)+0.045

=0.055+0.045

=0.1001 or 10.01%

Answer: Part 2:

Price=D1/R-g

D1=Dividend paid in next year

g=Growth rate

R=Required return

=$3.56/(0.11-0.0375)

=$49.10

Related Questions

Navigate

• Browse (All)
• Browse 3
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.