Question

2. Vogel AG is expected to pay a dividend next year (t=1) of D1= €3.00 per share. The stock has an equity cost of capital or required return of 10% per year. The current stock price is €50/share.

A. Calculate this firm’s expected future annual growth rate of dividends.

B. Calculate this firm’s expected stock price next year (t=1) after the dividend D1 has been paid out.

Answer 1

2)
A.	Annual growth rate	4%
Working:
As per dividend discount model,
Required return	=	(D1/P0)+g		Where,
0.10	=	(3.00/50.00)+g		D1	€       3.00
0.10	=	0.06+g		P0	€    50.00
g	=	0.04		g	growth rate	?
B.	Stock price	€    52.00
As per dividend discount model,
				Where,
Stock price	=	D1*(1+g)/(K-g)		D1	€       3.00
(t1)	=	3.00*(1+0.04)/(0.10-0.04)		g	0.04
	=	€    52.00		K	0.10