Question

King Waterbeds has an annual cash dividend policy that raises the dividend each year by 5 %. The most recent dividend, Div 0 , was $ 0.35 per share. What is the stock's price if
a. an investor wants a return of 7 %?
b. an investor wants a return of 10 %?
c. an investor wants a return of 11 %?
d. an investor wants a return of 14 %?
e. an investor wants a return of 18 %?

Answer 1

a. an investor wants a return of 7 %?

Stock price = Dividend*(1+Growth rate) /(Return required - Growth rate)

Stock price = 0.35*(1+5%)/(7%-5%)

Stock price = $18.38 (rounding to two decimal places)

b. an investor wants a return of 10 %?

Stock price = Dividend*(1+Growth rate) /(Return required - Growth rate)

Stock price = 0.35*(1+5%)/(10%-5%)

Stock price = $7.35 (rounding to two decimal places)

c. an investor wants a return of 11 %?

Stock price = Dividend*(1+Growth rate) /(Return required - Growth rate)

Stock price = 0.35*(1+5%)/(11%-5%)

Stock price = $6.13 (rounding to two decimal places)

d. an investor wants a return of 14 %?

Stock price = Dividend*(1+Growth rate) /(Return required - Growth rate)

Stock price = 0.35*(1+5%)/(14%-5%)

Stock price = $4.08 (rounding to two decimal places)

e. an investor wants a return of 18 %?

Stock price = Dividend*(1+Growth rate) /(Return required - Growth rate)

Stock price = 0.35*(1+5%)/(18%-5%)

Stock price = $2.83 (rounding to two decimal places)