In: Finance
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
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.