Question

A company is expected to maintain a constant 3 percent growth rate in its dividends indefinitely. If the company’s stock has a dividend yield of 4.85 percent, what is the required return on the stock? (Hint: dividend yield is a stock’s next dividend divided by its price.)

1. A company pays a constant $8.25 dividend on its stock. The company will maintain this dividend for the next 13 years and will then cease paying dividends forever. If the required return on this stock is 11.2 percent, what is the current share price? (Hint: this is a present value problem for annuity cash flows.)

2. A company has an issue of preferred stock outstanding that pays a $2.30 dividend every year in perpetuity. If this issue currently sells for $41.82 per share, what is the required rate of return?

3. A company has earnings of $3.18 per share. The benchmark PE for the company is 18. What stock price would you consider appropriate?

4. A young start-up company will not pay dividends on its stock over the next 9 years. The company will pay a dividend of $9 per share 10 years from today and will increase the dividend by 4 percent per year thereafter. If the required rate of return is 12 percent, what is the current share price?

   
   

Answer 1

r=(d1/p)+g=4.85+3=7.85%

dividend yield=d/p=4.85%

1)

2)

PERPETUAL SHARE=V=D/R

R=D/V=2.30/41.82=0.055=5.5%

3) P/E=18

EARNINGS=3.18 PER SHARE

PRICE=P/E*E=18*3.18=57.24

4)

NEED TO APPLY GROWDON GROWTH MODEL

D10=9

G=4%

R=12%

V9=D10/R-G=9/0.12-0.04=112.5

NOW WE NEED VALUE TODAY SO WE HAVE TO DISCOUNT V 9 --9YEARS BACK TO GET V0=40.568