In: Finance
3. MBV is a cruise line which announced that dividends are
expected to grow by 3.5 percent
annually, having paid a recent dividend of $1.20 per share last
month. If you require a 15
percent rate of return, how much are you willing to pay to purchase
one share of this stock
today?
4. What would you pay for a share of common stock of Pizza Hut
where the last dividend was $17
and dividend is expected to increase by 1.6 percent annually,
assuming a cost of equity of 15
percent?
2.The question using the dividend discount model.
Recent dividend= $1.20
Growth rate= 3.5%
Required rate of return= 15%
Price of the stock today= D1/(r-g)
where:
D1=next dividend payment
r=interest rate
g=firm’s expected growth rate
Price of the stock today= $1.20*(1+ 0.035)/ 0.15- 0.035
= $1.2420/ 0.1150 = $10.80.
3.The question using the dividend discount model.
Recent dividend= $17
Growth rate= 1.6%
Cost of equity= 15%
Price of the stock today= D1/(r-g)
where:
D1=next dividend payment
r=interest rate
g=firm’s expected growth rate
Price of the stock today= 17*(1+ 0.016)/ 0.15- 0.016
= 17.2720/ 0.1340 = $128.90.