9 Compute the value of a stock paying no dividends today, but that is expected t

Question

9 Compute the value of a stock paying no dividends today, but that is expected to pay annual dividends of $4 in five years. At that time dividends are expected to grow at a constant rate of 3%, and the firm's cost of equity is 11%. A $45-$50 B $50-$55 C > $55 D $40-$45 E < $40 10 If instead, the firm's stock was to pay a constant annual dividend of $4 starting in year 5, how would you value that stock? A < $18 B $26-$30 C $18-$22 D > $30 E $22-$26 11 Suppose the stock is expected to grow at a rate of 9% for the next four years that it started paying dividends, then slows to a long-term growth rate of 3%, how much is that stock worth today? A $40-$45 B $30-$35 C $35-$40 D > $45 E < $30

Explanation / Answer

Value of stock=Dividend next period/(r-g)
In 5 years value of stock shall be = 4*1.03/(0.11-0.03)=$51.50

Discount by 5 years = 51.50/(1.11^5)=$30.56

Hence option E is correct

10)

Value of stock=Dividend next period/(r-g)

Here g shall be zero
In 5 years value of stock shall be = 4/(0.11-0.00)=$36.36

Discount by 5 years = 36.36/(1.11^5)=$21.58

Hence option E is correct

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