In: Finance
Wonderland Corp. will pay a dividend of $3.5 next year. The
company plans to maintain a constant growth rate of 5 percent a
year forever. Investors’ required rate of return is 12
percent.
Robinson Corp. will pay the following dividends over the next four
years: $20, $18, $15 and $3. Afterwards the company pledges to
maintain a constant 5 percent growth rate in dividends, forever.
Investors’ required rate of return is 12 percent.
Required:
(a) How much will you pay for these two stocks?
(b) If both companies change its policy to maintain a constant growth rate of 4 percent, what is the percentage change of these two stocks?
(c) What does this tell you about the relationship and stock price sensitivity between the dividend growth and the stock price of these two stocks? [within 100 words]