Question

ABC company’s dividend is projected to be $2 next year (t=1) and is expected to grow by 10% for the following years (from t=2 to ∞).

22. What is the expected dividend in year 3? $ 4.46

$ 4.72

$ 4.29

$ 2.16

23. If the discount rate is 13%, what is the estimate of the stock price? $ 66.67

$ 129.79

$ 86.58

$ 99.68

24. Marquis Jewelers has expected earnings per share of $2.80 and an expected earnings growth rate of 4.5%. The discount rate on the stock is 11% and the retention ratio is 20%. What is the current value (price) of this stock? $29.07

$30.11

$34.46

$42.31

Answer 1

Given about ABC company,

dividend is projected to be $2 next year (t=1)

=> D1 = $2

expected growth rate g = 10%

22). So, dividend in year 3 = D1*(1+g)^2 = 2*1.1^2 = $2.42 (calculation and method is correct. Please check the option or question once again as their is some misprinting).

23). Required rate of return rs = 13%

So, stock price today using constant dividend growth model is

P0 = D1/(rs-g) = 2/(0.13-0.10) = $66.67

current value (price) of this stock = $66.67

24). Given about Marquis Jewelers,

expected earnings per share of $2.80 and an expected earnings growth rate of 4.5%. The discount rate on the stock is 11% and the retention ratio is 20%

=> EPS1 = $2.80

Dividend at year 1 D1 = EPS1*(1 - retention rate) = 2.80*(1-0.2) = $2.24

growth rate g = 4.5%

discount rate on stock d = 11%

So, stock price today using constant dividend growth model is

P0 = D1/(rs-g) = 2.24/(0.11-0.045) = $34.46

current value (price) of this stock = $34.46