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Anderson Corp just issued a stock dividend of$2.00 yesterday. The company plans on increasing the dividend...

Anderson Corp just issued a stock dividend of$2.00 yesterday. The company plans on increasing the dividend by 6% per year for the next 5 years. After which, the dividend will grow at 3% forever. The required rate of return is 10%.

A) Calculate the current price of the stock

B)Calculate what the price of the stock should be in 1 year

C) Calculate the Dividend yield and capital gains yield during the first year.

Expert Solution

D₀ = $2

Growth rate (g1) = 6%

n = 5 years

Growth rate (g2) = 3%

r (Required rate of return) = 10%

D1 = D0 * (1+g1) = $2 * 1.06 = $2.12

D2 = D1* (1+g1), D3 = D2* (1+g1), D4 = D3* (1+g1), D5 = D4* (1+g1)

P5 = D6* (1+g2)/ (r-g2) = (2.6764 * 1.03)/(0.10 - 0.03) = 39.38207,

		PVF (10%)	PVCF
D1	2.12	0.909091	1.927273
D2	2.2472	0.826446	1.85719
D3	2.382032	0.751315	1.789656
D4	2.524954	0.683013	1.724578
D5	2.676451	0.620921	1.661866
P5	39.38207	0.620921	24.45317

Current price of the stock			33.41373

A) Calculate the current price of the stock

Answer = $ 33.41

B)Calculate what the price of the stock should be in 1 year

Answer = $33.41 * (1+0.06) = 35.42

C) Calculate the Dividend yield and capital gains yield during the first year

Answer =

Dividend yield = $2.12 / $33.41 = 6.35%

Capital gains yield = 10.00% - 6.35% = 3.65%

During the non-constant growth period, the dividend yields and capital gains yields are not constant, and the capital gains yield does not equal g. However, after year 3, the stock becomes a constant growth stock, with g = capital gains yield = 3.0% and dividend yield = 10.0% - 3.0% = 7.0%.

jeff jeffy answered 3 months ago

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