Question

In: Finance

Your firm just paid a dividend of $1.80 that you plan to raise by 50% per...

Your firm just paid a dividend of $1.80 that you plan to raise by 50% per year for the next three years and then grow at a constant rate of 6%. If investors require a return of 11%, what should be the current price of your stock?

Solutions

Expert Solution

D0 1.8
For the first two years
g1 0.5
D1 1.8*(1+.5)
D1 2.7
D2 2.7*(1+.5)
D2 4.05
D3 4.05*(1+.5)
D3 6.075
Find the price of the stock in year 3
g2 0.06
D4 6.075*(1+.06)
D4 6.4395
According to the dividend growth model.
P3 = D4/(R-g2)
where R is the required return on the stock.
R = .11.
P3 6.4395/(.11 - .06)
P3 128.79
Cash flow in year 3 P3 +D3
Cash flow in year 3 134.865
The price of the stock today = sum of present value of future cash flows.
Using R = .11
Year 1 2 3
Cash flow 2.7 4.05 134.865
Present value 2.43 3.29 98.61
sum of present values 104.33
The stocks current price is equal to $104.33.

jeff jeffy answered 3 years ago
Next > < Previous

Related Solutions

Ford Motor Company just paid a dividend of $1.80 per share and its stock has a...
Ford Motor Company just paid a dividend of $1.80 per share and its stock has a beta of 1.2. Risk free rate is 4% and expected return of the stock market is 12%. Ford wants to change its dividend policy to one of the two alternatives, what will be today’s stock price under each situation? Keep plowback ratio at 100% for the next 5 years. At the end of the sixth year, Ford will pay a $3 per share dividend...
A company just paid a dividend of $1.53 per share and you expect the dividend to...
A company just paid a dividend of $1.53 per share and you expect the dividend to grow at a constant rate of 5.6% per year indefinitely into the future. If the required rate of return is 13.4% per year, what would be a fair price for this stock today? (Answer to the nearest penny per share.)
A company just paid a dividend of $0.79 per share and you expect the dividend to...
A company just paid a dividend of $0.79 per share and you expect the dividend to grow at a constant rate of 5.2% per year indefinitely into the future. If the required rate of return is 12.4% per year, what would be a fair price for this stock today? (Answer to the nearest penny per share.) A 6.4% coupon bearing bond pays interest semi-annually and has a maturity of 6 years. If the current price of the bond is $1,023.87,...
A firm just paid a dividend of $4.20. The dividend is expectedto grow at a...
A firm just paid a dividend of $4.20. The dividend is expected to grow at a constant rate of 4.06% forever and the required rate of return is 10.76%. What is the value of the stock?
A company just paid a dividend of $1.30 per share. You expectthe dividend to grow...
A company just paid a dividend of $1.30 per share. You expect the dividend to grow 11% over the next year and 8% two years from now. After two years, you have estimated that the dividend will continue to grow indefinitely at the rate of 5% per year. If the required rate of return is 12% per year, what would be a fair price for this stock today? (Answer to the nearest penny.)
Question 1/ Firm A has just paid a dividend of $1.5 per share. The dividends are...
Question 1/ Firm A has just paid a dividend of $1.5 per share. The dividends are expected to grow during year 1 by 14.5% and during year 2 by 11.9% and during year 3 by 8.5% and during year 4 by 6.5%. Starting from year 4 the dividends are expected to grow constantly by 4.5% forever. The required rate of return on the stocks is 12%. a/ Compute the intrinsic value of the stock now? (Show your steps) b/ Compute...
Quantitative Problem 1: Hubbard Industries just paid a common dividend, D0, of $1.80. It expects to...
Quantitative Problem 1: Hubbard Industries just paid a common dividend, D0, of $1.80. It expects to grow at a constant rate of 2% per year. If investors require a 10% return on equity, what is the current price of Hubbard's common stock? Round your answer to the nearest cent. Do not round intermediate calculations. $_____ per share Zero Growth Stocks: The constant growth model is sufficiently general to handle the case of a zero growth stock, where the dividend is...
A company just paid a dividend of $1.95 per share, and that dividend is expected to...
A company just paid a dividend of $1.95 per share, and that dividend is expected to grow at a constant rate of 4.50% per year in the future. The company's beta is 1.65, the market risk premium is 8.5%, and the risk-free rate is 6.50%. What is the company's current stock price?
InterTune, Inc., just paid a dividend of $3.00 per share. You expect the dividend to increase...
InterTune, Inc., just paid a dividend of $3.00 per share. You expect the dividend to increase by 15% next year, 10% the following two years, and then 4% indefinitely thereafter. If you require a rate of return of 10%, what is the most you should be willing to pay for a share of InterTune stock?
InterTune, Inc., just paid a dividend of $3.00 per share. You expect the dividend to increase...
InterTune, Inc., just paid a dividend of $3.00 per share. You expect the dividend to increase by 15% next year, 10% the following two years, and then 4% indefinitely thereafter. If you require a rate of return of 10%, what is the most you should be willing to pay for a share of InterTune stock?
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT