3. The expected dividend next year is $1.30 and dividends are expected to grow at 5%...

3. The expected dividend next year is $1.30 and dividends are expected to grow at 5% forever. What is the value of this promised dividend stream if the discount rate is
a) 8%
b) 5%
c) 3%

Solutions

Expert Solution

	Situation-1	Situation-2	Situation-3
Required discount rate	8%	5%	3%
Next dividend	$ 1.30	$ 1.30	$ 1.30
Growth rate	5%	5%	5%

Share price	Next dividend/(Cost - Growth)
Share price	=1.3/(8%-5%)	=1.3/(5%-5%)	=1.3/(3%-5%)
Share price	$ 43.33	#DIV/0!	$ (65.00)
Share price	$ 43.33	Can not be calculated	Can not be calculated

jeff jeffy answered 1 year ago

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