Question

In: Finance

Mariota Corp. just paid a dividend of $4.35 per share on its stock.

2. MC algo 8-40 Nonconstant Dividends

Mariota Corp. just paid a dividend of $4.35 per share on its stock. The dividend growth rate is expected to be 3.15 forever and investors require a return of 13.7 percent on this stock. What will the stock price be in 7 years?

Multiple Choice

$46.48
$51.23
$21.51
$52.84
$40.69

5. MC algo 8-29 Valuing Stock

Braxton's Cleaning Company stock is selling for $31.75 per share based on a required return of 9.9 percent. What is the the next annual dividend if the growth rate in dividends is expected to be 3.9 percent indefinitely?

Multiple Choice

$2.09
$1.91
$1.73
$1.98
$1.83

Solutions

Expert Solution

2.The question is calculated by using the dividend discount model.

Price of the stock in 7 years= D1/(r-g)

where:

D1= Dividend payment in year 8

r= interest rate

g= firm’s expected growth rate

Price of the stock in 7 years= $4.35*(1 + 0.0315)^8 / 0.137 - 0.0315

= $5.5750 / 0.1055

= $52.8436 $52.84.

Hence, the answer is option d.

5.The question is calculated by using the dividend discount model.

Price of the stock today= D1/(r-g)

where:

D1= Next dividend payment

r= interest rate

g= firm’s expected growth rate

$31.75 = Next dividend payment / 0.099 - 0.039

$31.75 = Next dividend payment / 0.06

Next dividend payment = $31.75*0.06

= $1.9050 $1.91.

Hence, the answer is option b.

In case of any query, kindly comment on the solution.

jeff jeffy answered 1 year ago

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