Question

1. Last year company x paid a dividend of $2 per share. Use a growth rate of 2% per year and a discount rate of 5% to value the stock. What is the implied stock price? State your answer in Dollars and cents.

LewCo, a construction company, pays an annual dividend to the stock owners on the last day of each year. LewCo paid a dividend of $10 per share on December 31^st, 2019. LewCo increased the dividend by 6% per year since the company started in 1958.

2. Today is January 1^st, 2020, and the stock price is $400 per share. What expected return (r*, discount rate, cost of capital) are investors attaching to LewCo based on the Gordon Growth model?

3. Based on the model, what will be the stock price for one year in the future on January 1^st, 2021? Remember that the company pays a dividend on Decmeber 3^rd of each year.

Answer 1

#calculation of stock price :

STOCK PRICE = D1/(r-g)

= $2.04/(0.05-0.02)

=$68

WORKING NOTE:D1= D0+g= $2+%2=$2.04

IMPLIED STOCK PRICE =D1/stock price

=$2.04/68

=$0.03

AS PER GORDAN GROWTH MODEL STOCK PRICE = CURRENT YR DIVIDEND / DIFFERENCE OF DISCOUNT RATE AND GROTH

#The expected returns of Lew Co be x

as per the abouve formula

400=10/(0.06-x)

0.06-x= 0.025

x=0.035

rate of returns =3.5% i.e 0.035*100

#CALCULATION OF STOCK PRICE ON 1ST JANUARY 2021:

=10+6%/(0.06-0.035)

=10.6/0.035

=$302.86