Question

1.Stacker Weight Loss currently pays an annual​ year-end dividend of ​$1.6 per share. It plans to increase this dividend by

3.5%next year and maintain it at the new level for the foreseeable future. If the required return on this​ firm's stock is

7%​, what is the value of​ Stacker's stock?

2. Jia's Fashions recently paid a $2 annual dividend. The company is projecting that its dividends will grow by 20 percent next year, 12 percent annually for the two years after that, and then at 6 percent annually thereafter. Based on this information, how much should Jia's Fashions common stock sell for today if her required return is 10%?

Answer 1

(a)
Annual year end dividend			1.6
Growth rate for next year and forever		3.5% or	0.035
Dividend for next year (D1)=		1.6 * (1+0.035)	1.656
Required rate of return (ke)=		7% or	0.07
Value of stock formula = D1/(ke-g)
1.656/(0.07-0.035)
47.31429
So, Value of stock is $47.31
(b)
Annual dividend paid			2
Growth for next year		20% or	0.2
Growth annually for 2 years after next year		12% or	0.12
And then growth rate		6% or	0.06
Required rate of return (ke)=		10% or	0.1
Dividend for next year (D1)= 2 + (1+0.2)=			2.4
Dividend for second year (d2) = 2.4 *(1+0.12)=			2.688
Dividend for third year (d3)= 2.688 * (1+0.12)=			3.01056
Dividend for forth year 3.01056 * (1+0.06)=			3.191194
Value of stock at end of 3rd Year = D4/(Ke-g)
3.191194/(0.1-0.06)
79.77984
Present value of stock shall be present value of divend received for 3 years and value of stock at end of 3rd Year
Year	cash flows	P.V.F.@10%	P.V. of cash flows
1	2.4	0.909091	2.181818
2	2.688	0.826446	2.221488
3	3.01056	0.751315	2.261878
3 (P3)	79.77984	0.751315	59.93977
	Value of stock		66.60496
So, Value of stock is $66.60.
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