1. Suppose you are looking at the common stock of Apple Inc. You expect the next

Question

1. Suppose you are looking at the common stock of Apple Inc. You expect the next year dividend payment will be $3.50 per share and the stock price after the dividend payment will be $410. If you require a 15% return rate on the investment on this stock, how much are you willing to pay now for a share of Apple Inc. stock?

2. Charlie’s Music just announced that they will start paying annual dividends next year. They plan to pay $1.00 a year for three years, then $1.20 a year for the following two years, and after that stop paying dividends for ever. How much is one share of this stock worth to you today if you require a 10 percent rate of return?

3. Gordon Net Company is expected to pay the same amount of annual dividend of $4 per share for ever. The required return on this stock is 16%. What is the price of the share today?

Explanation / Answer

1.The Value of the stock after one year = $410 + $3.5 = $413.5

So, the amount to be paid with 15% of return = $413.5/1.15 = $359.57

2. Price of the stock next year = [D1/(1+.10)] + [D2/(1+.10)2] +[D1/(1+.10)3]
=> [$1.0/(1.1)] + [$1.2/(1.10)2] +[$1.2/(1.10)3] = $2.80

Price of stock today = $2.80/1.10 = $2.55

3. Price of the stock = Dividend / Ke => $4/0.16 = $25

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