1) Q Corp is currently selling for $33 per share. Its dividends have been growin

Question

1) Q Corp is currently selling for $33 per share. Its dividends have been growing at a constant 2.5% per year. Next year it expects to pay a dividend of $1.75. What is its expected return (discount rate)?  

2) Xytex Products just paid a dividend of $1.75 per share, and the stock currently sells for $23. If the discount rate is 12 percent, what is the dividend growth rate?

3) Could I Industries just paid a dividend of $1.75 per share. The dividends are expected to grow at a 18 percent rate for the next six years and then level off to a 3 percent growth rate indefinitely. If the required return is 14 percent, what is the value of the stock today?

4) Now suppose Could I Industries expects to grow erratically over the next 4 years. It omitted its dividend this year. It plans to pay no dividends in year 1, and then pay dividends of 1.30, 2.40 and 3.50 in years 2, 3 and 4, respectively. Beginning in year 5 it expects its dividends to grow 2.0 percent per year into perpetuity. Because of this erratic growth, investors are demanding a return of 16%. What is the value of the stock today?

Explanation / Answer

Answer 1.

Current Price, P0 = $33
Growth Rate, g = 2.5%
Expected Dividend, D1 = $1.75

Required Return = D1 / P0 + g
Required Return = $1.75 / $33 + 0.025
Required Return = 0.0780 or 7.80%

Answer 2.

Last Dividend, D0 = $1.75
Required Return, r = 12%
Current Price, P0 = $23

Let growth rate be g

Required Return = D0*(1+g) / P0 + g
0.12 = $1.75*(1+g) / $23 + g
0.12 = 0.0761 + 0.0761*g + g
0.0439 = 1.0761*g
g = 0.0408 or 4.08%

So, growth rate is 4.08%

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