Question

In: Economics

C. Problem: (05 marks) Stock C just paid a dividend of $2. The required return is...

C. Problem:

Stock C just paid a dividend of $2. The required return is 12%. Find the price of the stock when the dividend growth rates are:

a. 0%

b. 5%

Expert Solution

Ans.

a)

Growth rate , G = 0%

Dividend , D = $2

RR = 12% or 0.12

Stock Price = D ( 1 + G ) / ( RR - G )

= 2 ( 1 + 0 ) / ( 0.12 - 0 )

= 2 / 0.12 = 16.67

b)

Growth rate , G = 5% or 0.5

Dividend , D = $2

RR = 12% or 0.12

Stock Price = D ( 1 + G ) / ( RR - G )

= 2 ( 1 + 0.05) / ( 0.12 - 0.05 )

= 2 ( 1.05 ) / 0.07

= 2.1 / 0.7 = 30

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Rahul Sunny answered 2 years ago

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