Question

In: Finance

A. No Growth DDM A perpetual preferred stock pays an annual dividend of $2.20 per share...

A.

No Growth DDM A perpetual preferred stock pays an annual dividend of $2.20 per share and investors require an 9% return. The intrinsic value of a share of this stock is _______.

$20.87

$24.44

$ 19.80

$23.98

B.

Constant Growth DDM A stock just paid a dividend of $1.00 per share. Dividends are expected to grow at a constant rate of 9% per year forever. Investors expect and require a 12% return on this investment. The intrinsic value of this stock is __________.

$35.77

$36.33

$36.08

$35.89

Expert Solution

A.

Perpetual stock pays periodic dividend for indefinite period of time.

Value of stock = Periodic dividend/ expected return

= 2.2/ 0.09

= 24.44

B.

Stock value = Divided (D1)/ (required return – dividend growth rate)

= (1 * 1.09)/ (.12 – 0.09)

= 1.09/ 0.03

= 36.33

jeff jeffy answered 2 years ago

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