Question

In: Finance

A fast growth share has the first dividend (t=1) of $1.48. Dividends are then expected to...

A fast growth share has the first dividend (t=1) of $1.48. Dividends are then expected to grow at a rate of 6 percent p.a. for a further 2 years. It then will settle to a constant-growth rate of 2.3 percent. . If the required rate of return is 12 percent, what is the current price of the share? (

Expert Solution

D₁ = $ 1.48

D₂ = D₁ x (1+g) = $ 1.48 x 1.06 = $ 1.5688

D₃ = D₂ x (1+g) = $ 1.5688 x 1.06 = $ 1.662928

D₄ = D₃ x (1+g) = $ 1.662928 x 1.023 = $ 1.701175344

Price of share in year 3, P₃ can be computed using dividend discount model as,

P₃ = D₄/(r-g)

r = cost of capital = 12 % or 0.12

g = Constant growth rate of dividends = 2.3 % or 0.023

P₃ = $ 1.701175344/ (0.12 – 0.023)

= $ 1.701175344/ 0.097

= $ 17.5378901443299

Current stock price, P = D₁/ (1+r) + D₂/ (1+r) ² + D₃/ (1+r) ³ + P₃/ (1+r) ³

= $ 1.48/ (1+0.12) + $ 1.5688/ (1+0.12) ² + $ 1.662928/ (1+0.12) ³+ $17.5378901443299/ (1+0.12) ³

= $ 1.48/ (1.12) + $ 1.5688/ (1.12) ² + $ 1.662928/ (1.12) ³ + $ 17.5378901443299/ (1.12) ³

= $ 1.48/ 1.12 + $ 1.5688/ 1.2544 + $ 1.662928/ 1.404928 + $ 17.5378901443299/ 1.404928

= $ 1.32142857142857 + $ 1.25063775510204 + $ 1.18363930393586 + $ 12.4831237930555

= $ 16.23882942352197 or $ 16.24

Current price of each share is $ 16.24

jeff jeffy answered 10 months ago

A fast growth share has the first dividend (t=1) of $2.33. Dividends are then expected to...

A fast growth share has the first dividend (t=1) of $2.33. Dividends are then expected to grow at a rate of 9 percent p.a. for a further 2 years. It then will settle to a constant-growth rate of 3.1 percent. If the required rate of return is 13%, what is the current price of the share? (to the nearest cent) a. $25.95 b. $45.88 c. $23.54 d. $45.62

A fast growth share has the first dividend (t=1) of $2.35. Dividends are then expected to...

A fast growth share has the first dividend (t=1) of $2.35. Dividends are then expected to grow at a rate of 8 percent p.a. for a further 3 years. It then will settle to a constant-growth rate of 3.0 percent. . If the required rate of return is 14 percent, what is the current price of the share? (to the nearest cent) Select one: a. $24.03 b. $53.84 c. $21.36 d. $26.44

A fast growth share has the first dividend (t=1) of $1.20. Dividends are then expected to...

A fast growth share has the first dividend (t=1) of $1.20. Dividends are then expected to grow at a rate of 6 percent p.a. for a further 3 years. It then will settle to a constant-growth rate of 2.6 percent. . If the required rate of return is 13 percent, what is the current price of the share? (to the nearest cent) Show working out

A fast growth share has the first dividend (t=1) of $1.94. Dividends are then expected to...

A fast growth share has the first dividend (t=1) of $1.94. Dividends are then expected to grow at a rate of 7 percent p.a. for a further 4 years. It then will settle to a constant-growth rate of 3.0 percent. . If the required rate of return is 16 percent, what is the current price of the share? (to the nearest cent) Select one: a. $16.75 b. $50.49 c. $14.92 d. $11.90

A fast growth share has the first dividend (t=1) of $2.41. Dividends are then expected to...

A fast growth share has the first dividend (t=1) of $2.41. Dividends are then expected to grow at a rate of 6 percent p.a. for a further 2 years. It then will settle to a constant-growth rate of 1.6 percent. . If the required rate of return is 16 percent, what is the current price of the share? (to the nearest cent) Select one: a. $17.95 b. $36.10 c. $16.74 d. $17.91 A company has its share currently selling at...

A fast growth has the first dividend (t=1) of $3.10. Dividends are then expected to grow...

A fast growth has the first dividend (t=1) of $3.10. Dividends are then expected to grow at a rate of 8 percent p.a. for a further 4 years. it then will settle to a constant-growth rate of 1.8 percent. If the required rate of return is 19 percent, what is the current price of the share? (to nearest cent)

Sprockley Company has just paid a $1 per share dividend. It is expected that dividends will...

Sprockley Company has just paid a $1 per share dividend. It is expected that dividends will grow at 16% per year for the next 2 years, at 10% the third year and 8% in year 4. After that, dividend growth is expected to be 3% per year forever. Sprockley’s equity ? is 0.9. If Treasury bills yield 5% and the market risk premium is 8.3%, what should be Sprockley’s current stock price? $10.00 $12.05 $15.00 $42.00 $45.75

1.) XYZ Corporation's next dividend is expected to be $3 per share. Dividend growth rate has...

1.) XYZ Corporation's next dividend is expected to be $3 per share. Dividend growth rate has been at 2% and expected to be so into the future. If investor's return is 10%, calculate the stock price next year. A) 37.50 B) 38.25 C) 38.50 D) 38.75 E) None of the above Which of the following typically applies to preferred stock but not to common stock? A) Par Value B) Dividend yield C) Cumulative dividends D) It is legally considered equity...

1.Delta Ltd has just paid a dividend of $6 per share. If the dividends are expected...

1.Delta Ltd has just paid a dividend of $6 per share. If the dividends are expected to grow at a constant rate of 8% per year indefinitely, what will be the share price (to the nearest dollar) in 2 years- time, if investors require a return of 12%? A) $135 B) $189 C) $146 D) $126 2.A share currently sells for $28 a share. Its dividend is growing at a constant rate, and its dividend yield is 5 percent. The...

The Duo Growth Company just paid a dividend of $1 per share. The dividend is expected...

The Duo Growth Company just paid a dividend of $1 per share. The dividend is expected to grow at a constant rate of 10% per year forever. The stock has a beta of 1.25 and the risk- ree rate is 7%, while the expected rate of return of the whole market is 12%. a) What is the required rate of return on the Duo Growth stock b) What is your estimate of the intrinsic value of a share of the...