a. Tripple Plunge Corporation will pay a dividend of $4 next year and the stock

Question

a. Tripple Plunge Corporation will pay a dividend of $4 next year and the stock is currently selling for $40. Investors expect 12% the rate of return on this stock. What is the growth rate of this stock?

b. Tripple Plunge Corporation issued stocks that pay a dividend of $2 and the dividends do not expect to grow. What is the price of this stock if the discount rate is 10%?

c. What is the rate of return for an investor who pay $1,054.47 for a three-year bond with a 7% coupon and sells the bond one year later for $1,037.19?

Explanation / Answer

a)

Stock price, P0 = D1÷(r-g)

D1 is next expected dividend

r is required return

g is growth rate

$40 = $4÷(12%-g)

12%-g = 10%

Growth rate, g = 2%

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