Question

Ecology Labs Inc. will pay a dividend of $3.75 per share in the next 12 months (D₁). The required rate of return (K_e) is 16 percent and the constant growth rate is 6 percent. (Each question is independent of the others.)   
  
a. Compute the price of Ecology Labs' common stock. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
  

price:
  
b. Assume K_e, the required rate of return, goes up to 19 percent. What will be the new price? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
  

new price:
  
c. Assume the growth rate (g) goes up to 10 percent. What will be the new price? K_e goes back to its original value of 16 percent. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
  

new price:
  
d. Assume D₁ is $5.00. What will be the new price? Assume K_e is at its original value of 16 percent and g goes back to its original value of 6 percent. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
  

new price:

Answer 1

Dividend discounting method is used to find the share present value by discounting the predicted dividend

Formula is,

Value of share = Dividend per share/ (Discount rate -Dividend growth rate)

Let's put all the values in the formula

= 3.75/ 0.16 -0.06

= 3.75/ 0.1

= 37.5

So the price of the stock is $37.5

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Let's put all the values in the formula

= 3.75/ 0.19 -0.06

= 3.75/ 0.13

= 28.85

So the price of the stock is $28.85

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Let's put all the values in the formula

= 3.75/ 0.16 -0.1

= 3.75/ 0.06

= 62.5

So the price of the stock is $62.5

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Let's put all the values in the formula

= 5/ 0.16 -0.06

= 5/ 0.1

= 50

So the price of the stock is $50

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