Question

Marco owns one share of stock of Platinum Water Media and one share of stock of Silver Sun Consulting. The total value of his holdings is 118.33 dollars. Both stocks pay annual dividends that are expected to continue forever. The expected return for Platinum Water Media stock is 14.42 percent and its annual dividend is expected to remain at 7.13 dollars forever. What is the expected return for Silver Sun Consulting stock if its next dividend is expected to be 6.02 dollars and all subsequent dividends are expected to grow by 2.63 percent annually? The next dividend for both firms’ stocks will be paid in one year. Answer as a rate in decimal format so that 12.34% would be entered as .1234 and 0.98% would be entered as .0098.

Answer 1

Marco owns one share of stock of Platinum Water Media and one share of stock of Silver Sun Consulting which comparises of total holding value of $118.33

Expected Return for Platinum Water Media = 14.42%

Expected annual dividend which will remain same each year forever = $7.13

There will be no growth rate in dividend as Dividend will reamin same each year.

Calculating the Current Price for Platinum Water Media:-

Price = Annual Dividend/Expected Return

= $7.13/14.42%

= $49.4452

So, Current Price of Platinum Water Media is $49.4452

Current price for Silver Sun Consulting = Total Holding Value - Current Price of Platinum Water Media

= $118.33 - $49.4452

= $68.8848

Expected next dividend for Silver Sun Consulting(D1) = $6.02

Expected Growth rate (g) = 2.63%

Calculating the Expected return for Silver Sun Consulting :-

Ke = 11.37%

So, the expected return for Silver Sun Consulting stock is 0.1137

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