Question

Stock A will pay a dividend of $2, which is expected to grow at 5% indefinitely....

Stock A will pay a dividend of $2, which is expected to grow at 5% indefinitely. r = 10%.

(i)                 What is the price if interest rate goes up by 1%?

(ii)              What is the price if interest rate goes down by 1%?

(iii)            What is the price if growth rate goes up by 1%?

(iv)             What is the price if growth rate goes down by 1%?

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Homework Answers

Answer #1
P0 = Price of Share
D1 = Current Dividend
Ke = Cost of Equity
g = growth rate
P0 = D1 / (Ke - g)
P0 = 2/(10%-5%)
P0 =                 40.00
1) P0 = D1 / (Ke - g)
P0 = 2/(11%-5%)
P0 = 33.33333333
2) P0 = D1 / (Ke - g)
P0 = 2/(9%-5%)
P0 =                 50.00
3) P0 = D1 / (Ke - g)
P0 = 2/(10%-6%)
P0 =                 50.00
4) P0 = D1 / (Ke - g)
P0 = 2/(10%-4%)
P0 =                 33.33
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