Question

a) Schnusenberg Corporation next dividend of D ₁ = $0.75 per share, and that dividend is expected to grow at a constant rate of 6.50% per year in the future. The company's required return is 14.7%. What is the company's current stock price?

	a.	$12.56
	b.	$9.15
	c.	$6.88
	d.	$8.80
	e.	$12.74

b) Huang Company's last dividend was $1.25. The dividend growth rate is expected to be constant at 27.5% for 3 years, after which dividends are expected to grow at a rate of 6% forever. If the firm's required return (r _s) is 13%, what is its current stock price?

	a.	$54.54
	b.	$31.99
	c.	$36.35
	d.	$45.14
	e.	$41.99

Answer 1

a). Given about Schnusenberg Corporation

next dividend of D1 = $0.75

dividend growth rate g = 6.5%

The company's required return rs = 14.7%

So, value of stock today using constant dividend growth rate = D1/(rs-g) = 0.75/(0.147-0.065) = $9.15

Option b is correct.

b). Given about Huang Company's,

last dividend D0 = $1.25.

The dividend growth rate is expected to be constant at 27.5% for 3 years,

So, D1 = D0*1.275 = 1.25*1.275 = $1.5938

D2 = D1*1.275 = 1.5938*1.275 = $2.0320

D3 = D2*1.275 = 2.032*1.275 = $2.5908

thereafter which dividends are expected to grow at a rate of 6% forever.

g = 6%

If the firm's required return rs = 13%

So, value of stock at year 3 using constant dividend growth rate is

P3 = D3*(1+g)/(rs-g) = 2.5908*1.06/(0.13-0.06) = $39.2327

So, stock price today is sum of PV of future dividends and P3 discounted at rs

=> P0 = D1/(1+rs) + D2/(1+rs)^2 + D3/(1+rs)^3 + P3/(1+rs)^3

=> P0 = 1.5938/1.13 + 2.0320/1.13^2 + 2.5908/1.13^3 + 39.2327/1.13^3 = $31.99

Current stock price = $31.99

option b is correct.