Wonderland Corp. will pay a dividend of $3.5 next year. The company plans to maintain a...

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]

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Expert Solution

jeff jeffy answered 1 year ago

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