Question

Chapter 7 Additional Problems

1. The OWB Company paid $2.1 of dividends this year. If its dividends are expected to grow at a rate of 3 percent per year, what is the expected dividend per share for OWB five years from today?

2. The current price of ABC stock is $35 per share. If ABC’s current dividend is $1.5 per share and investors ‘required rate of return is 10 percent, what is the expected growth rate of dividends for ABC. Use constant dividend growth model.

3. Consider each of the following stocks, and solve for the missing element:

Stock	Current Year Dividend	Expected Dividend Growth	Required Rate or Return	Price of Stock
A	$1.50	5.0%	8.0%
B		4.0%	6.0%	$26.00
C	$2.00		10.0%	$31.00
D	$0.75	3.0%		$9.75
E	$1.10	6.0%	10.0%

4. Identify the relation between a stock’s price and the factors that determine the price, based on the constant-growth dividend valuation model:

For example, the relationship is positive if an increase in the factor results in an increase in the share price.

	Relationship with share price
Factor	Positive or negative
Current Dividend
Growth rate of dividends
Required Rate or Return

Chapter 7 Additional Problems

1. The OWB Company paid $2.1 of dividends this year. If its dividends are expected to grow at a rate of 3 percent per year, what is the expected dividend per share for OWB five years from today?

2. The current price of ABC stock is $35 per share. If ABC’s current dividend is $1.5 per share and investors ‘required rate of return is 10 percent, what is the expected growth rate of dividends for ABC. Use constant dividend growth model.

3. Consider each of the following stocks, and solve for the missing element:

Stock	Current Year Dividend	Expected Dividend Growth	Required Rate or Return	Price of Stock
A	$1.50	5.0%	8.0%
B		4.0%	6.0%	$26.00
C	$2.00		10.0%	$31.00
D	$0.75	3.0%		$9.75
E	$1.10	6.0%	10.0%

4. Identify the relation between a stock’s price and the factors that determine the price, based on the constant-growth dividend valuation model:

For example, the relationship is positive if an increase in the factor results in an increase in the share price.

	Relationship with share price
Factor	Positive or negative
Current Dividend
Growth rate of dividends
Required Rate or Return

Answer 1

a.D0= $2.10 g = 3% per year

Dividend after 5 years= 2.10*(1.03)⁵ =2.10*1.15927= $2.43448

Price of share is given by

P0= D0(1+g)/(Re-g)

b. 35= 1.5(1+g)/0.10-g

3.5-35g= 1.5+1.5g

2= 36.5g

g= 0.05479 or 5.47945%

C.

Stock A=P0= 1.50*1.05/(0.08-0.05)= 1.575/0.03= $52.50

Stock B 26= D0*1.04/0.06-0.04,0.52= D0*1.04,D0= $0.50

Stock C 31= 2(1+g)/0.1-g, 3.1-31g= 2+2g,1.1= 33g,g= 0.3333 or 3.3333%

Stock D 9.75= 0.75*1.03/(Re-0.03), 9.75= 0.7725/(Re-0.03), Re-0.03= 0.0792, Re= 0.1092 or 10.92%

Stock E P0= 1.10*1.06/(0.10-0.06)= 1.166/0.04=$ 29.15

D.As per GGM

If dividend rises ,share price rises, there is positive relationship between dividend and stick price.

If Growth rate increases ,share price increases, there is positive relation between share price and growth rate.

If required rate of return increases ,share price decreases, there is inverse ( negetive) relationship between required rate of return and share price..