Question

In: Finance

InterTune, Inc., just paid a dividend of $3.00 per share. You expect the dividend to increase...

InterTune, Inc., just paid a dividend of $3.00 per share. You expect the dividend to increase by 15% next year, 10% the following two years, and then 4% indefinitely thereafter. If you require a rate of return of 10%, what is the most you should be willing to pay for a share of InterTune stock?

Solutions

Expert Solution

Under the dividend discount model, the price which an investor is willing to pay for the share is the present value of future dividends expected from that share discounted at investors expected rate of return (in the given case - 10%)

The future dividends based on growth rates given are captured, after the 4th year the dividend is perpetually expected to grow at 4% hence using the PV of growing perpetuity formula (Dividend/Discount rate- Growth rate) the PV as of 4th year is arrived and then yearly dividends are discounted at Investors expected rate (10%) to arrive at stock price. Below table summarizes the same

Thus the price for Intertune stock which the investor willing to be paid would be $ 58.83 (all calculations rounded to two decimals)

jeff jeffy answered 9 months ago
Next > < Previous

Related Solutions

InterTune, Inc., just paid a dividend of $3.00 per share. You expect the dividend to increase...
InterTune, Inc., just paid a dividend of $3.00 per share. You expect the dividend to increase by 15% next year, 10% the following two years, and then 4% indefinitely thereafter. If you require a rate of return of 10%, what is the most you should be willing to pay for a share of InterTune stock?
A company just paid a dividend of $1.53 per share and you expect the dividend to...
A company just paid a dividend of $1.53 per share and you expect the dividend to grow at a constant rate of 5.6% per year indefinitely into the future. If the required rate of return is 13.4% per year, what would be a fair price for this stock today? (Answer to the nearest penny per share.)
A company just paid a dividend of $0.79 per share and you expect the dividend to...
A company just paid a dividend of $0.79 per share and you expect the dividend to grow at a constant rate of 5.2% per year indefinitely into the future. If the required rate of return is 12.4% per year, what would be a fair price for this stock today? (Answer to the nearest penny per share.) A 6.4% coupon bearing bond pays interest semi-annually and has a maturity of 6 years. If the current price of the bond is $1,023.87,...
IBM just paid a dividend of $1.6 per share. You expect IBM's dividend to grow at...
IBM just paid a dividend of $1.6 per share. You expect IBM's dividend to grow at a rate of 9% per year for the next three years, and then you expect constant dividend growth of 4% forever. Based on the risk of IBM stock, you require a return of 13%. Using the dividend discount model, what is the value of IBM stock?
Integrated Potato Chips just paid a $1.5 per share dividend. You expect the dividend to grow...
Integrated Potato Chips just paid a $1.5 per share dividend. You expect the dividend to grow steadily at a rate of 6% per year. a. What is the expected dividend in each of the next 3 years? (Do not round intermediate calculations. Round your answers to 2 decimal places.) b. If the discount rate for the stock is 10%, at what price will the stock sell today? (Do not round intermediate calculations. Round your answer to 2 decimal places.) c....
The In-Tech Co. just paid a dividend of $1 per share. Analysts expect its dividend to...
The In-Tech Co. just paid a dividend of $1 per share. Analysts expect its dividend to grow at 25% per year for the next three years and then at a constant growth rate per year thereafter. The estimate of the constant growth rate of dividend is based on the long term return of equity 25% and payout ratio 80%. If the required rate of return on the stock is 18%, what is the current value of the stock? Clearly show...
The In-Tech Co. just paid a dividend of $1.5 per share. Analysts expect its dividend to...
The In-Tech Co. just paid a dividend of $1.5 per share. Analysts expect its dividend to grow at 20 percent per year for the next three years and then 3 percent per year thereafter. If the required rate of return on the stock is 5.5 percent. What is the current value of the stock ? 96.80 94.15 none of the above 98.30 92.16
Mack Industries just paid a dividend of $1.00 per share. Analysts expect the company's dividend to...
Mack Industries just paid a dividend of $1.00 per share. Analysts expect the company's dividend to grow 20% this year and 15% next year. After 2 years the dividend is expected to grow at a constant rate of 5%. The required rate of return on the company's stock is 12%. What is the current price of the company's stock? Also, the stock is currently priced in the market as of today at $20.00 per share. As an investor would you...
Suppose the Bastille Corp. has just paid a dividend of $3.00 per share. Dividends for Bastille...
Suppose the Bastille Corp. has just paid a dividend of $3.00 per share. Dividends for Bastille are expected to grow at a rate of 10% for 2 years and then 2% per year indefinitely. If the required return is 15%, what is the value of a share of Bastille stock today? a. $24.40 b. $27.15 c. $36.78 d. $53.44 e. $70.87
Digital Plc just paid a dividend of $3 per share. Analysts expect its dividend to grow...
Digital Plc just paid a dividend of $3 per share. Analysts expect its dividend to grow at 12% per year for the next three years and then 6% per year, indefinitely thereafter. If the required rate of return on the stock is 10%, what is the current value of the stock? a) 93 b) 87 c) 77 d) 69 e) 98
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT