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Answer the dividend question below: a. A is expected to pay a dividend of $2 per...

Answer the dividend question below:

a. A is expected to pay a dividend of $2 per share to its shareholders one year from today. The dividend is then expected to grow year-over-year at a constant rate of 4% (EAR) in perpetuity. The equity cost of capital for A is 8%. What is the current price per share of A?

b. B is currently paying no dividends. It expects to begin paying a dividend of $3 per share to its shareholders 3 years from today. It will then continue to pay a $3 dividend per share each year in perpetuity. The equity cost of capital for B is 10%. What is the current price per share of B?

c. C is expected to pay a dividend of $4 per share for the next four years. The dividend is expected to start growing at a constant rate g immediately after the year 4 dividend. That is, the dividend per share in year 5 will be 4*(1+g), the dividend per share in year 6 will be 4*(1+g)2 , etc. Suppose the price of the C stock is currently $80 per share. If the C equity cost of capital is 10%, what must be the dividend growth rate g?

Solutions

Expert Solution

Answer:

a) Current price of share A = $50

b) Current price of share B = $24.79

c) Growth rate of share C = 5.71%

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jeff jeffy answered 2 years ago
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