Question

King Waterbeds has an annual cash dividend policy that raises the dividend each year by 44​%. The most recent​ dividend, Div0​, was $0.40 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 15%?

e. an investor wants a return of 19%?

Answer 1

a.

Calculate the stock price at 7% cost of capital as follows:

Stock price = Expected dividend / (Cost of equity - Growth)

= ($0.4*(1+44%)) / ( 7%-44%)

= - $1.56.

Therefore, the stock price is -$1.56.

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b.

Calculate the stock price at 10% cost of capital as follows:

Stock price = Expected dividend / (Cost of equity - Growth)

= ($0.4*(1+44%)) / ( 10%-44%)

= - $1.69.

Therefore, the stock price is -$1.69.

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c.

Calculate the stock price at 11% cost of capital as follows:

Stock price = Expected dividend / (Cost of equity - Growth)

= ($0.4*(1+44%)) / ( 11%-44%)

= - $1.75.

Therefore, the stock price is -$1.75.

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d.

Calculate the stock price at 15% cost of capital as follows:

Stock price = Expected dividend / (Cost of equity - Growth)

= ($0.4*(1+44%)) / ( 15%-44%)

= - $1.99.

Therefore, the stock price is -$1.99.

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e.

Calculate the stock price at 19% cost of capital as follows:

Stock price = Expected dividend / (Cost of equity - Growth)

= ($0.4*(1+44%)) / ( 19%-44%)

= - $2.30.

Therefore, the stock price is -$2.30.