Elk County Telephone has paid the dividends shown in the following table over th
ID: 2759956 • Letter: E
Question
Elk County Telephone has paid the dividends shown in the following table over the previous 6 years:
Year / Dividend per share
2015 $3.48
2014 $3.38
2013 $3.28
2012 $3.18
2011 $3.09
2010 $3.00
The firm's dividend per share next year is expected to be $3.58.
A. If you can earn 14% on similar-rish investments, what is the most you would be willing to pay per share?
B. If you can earn only 11% on similar -risk investments, what is the most you would be willing to pay per share?
c. According to the findings in part a and b, as risk decreases, the required rate of return (increases/decreases), causing the share price to (fall/rise)
Explanation / Answer
Growth rate in dividends:
= ($3.58÷$3)^(1÷3)-1
=(1.193)^0.67= 1.125%
a)
Stock price = D1÷(r-g)
D1 is next expected dividend
r is required return
g is growth rate
= $3.58÷(14%-1.125%)
= $27.81
b)
Stock price = D1÷(r-g)
D1 is next expected dividend
r is required return
g is growth rate
= $3.58÷(11%-1.125%)
= $36.25
c)
If required rate of return decreases, causing share price to rise.
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