Question

Company X currently paid a $4 per share dividend on its common stock. Dividends are expected to grow forever at 6% and investors require a 15% rate of return. Company X's management is planning to enter new, risky markets to increase its expected dividend growth. However, due to increased risk, the investors required rate of return will increase to 20%. What must be the new value for the dividend growth to justify entering the new, risky markets and to keep stock price from decreasing?

Answer #1

Expected dividend = 4 x (1+Growth rate) = 4 x (1+6%)

Stock price with current growth rate = Dividend x (1+Growth rate)/(Required rate-Growth rate)

Stock price with current growth rate = 4 x (1+6%)/(15%-6%)

Stock price with current growth rate = $47.111111

----

Now, as new required return has changed to 20%, then keeping same stock price we can get new growth rate:

Stock price = Dividend x (1+Growth) / (Required return-Growth rate)

47.111111 = 4 x (1+Growth rate) / (20%-Growth rate)

47.1111111 x 20% - 47.111111 x Growth rate = 4 + 4 x Growth rate

51.111111 Growth rate = 9.422222 – 4

Growth rate = 5.422222/51.111111

Growth rate **= 10.61%**

The Pioneer Corporation currently paid a $3.00 per share
dividend on its common stock. Dividends are expected to grow
forever at 3%, and investors require a 12% rate of return.
Pioneer's management is planning to enter new, risky markets to
increase its expected dividend growth. However, in response to the
increased risk, the investors' required rate of return will
increase to 15%. What must be the new value for the dividend growth
to justify entering the new, risky markets and...

Storico Co. just paid a dividend of $1.95 per share. The company
will increase its dividend by 24 percent next year and then reduce
its dividend growth rate by 6 percentage points per year until it
reaches the industry average of 6 percent dividend growth, after
which the company will keep a constant growth rate forever. If the
stock price is $40.95, what required return must investors be
demanding on the company's stock? (Hint: Set up the
valuation formula with...

Your company just paid a dividend of $4.0 per share. The company
will increase its dividend by 5% next year and will then increase
its dividend growth rate by 2% points per year ( from 5% to 7% to
9% to 11%) until it reaches the industry average of 11% dividend
growth, after which the company will keep a constant growth rate
forever. The required return on your company’s stock is 13%. What
will a share of stock sell for...

Storico Co. just paid a dividend of $3.15 per share. The company
will increase its dividend by 20 percent next year and then reduce
its dividend growth rate by 5 percentage points per year until it
reaches the industry average of 5 percent dividend growth, after
which the company will keep a constant growth rate forever. If the
stock price is $54.50, what required return must investors be
demanding on the company's stock? (Hint: Set up the valuation
formula with...

Storico Co. just paid a dividend of $3.15 per share. The company
will increase its dividend by 20 percent next year and then reduce
its dividend growth rate by 5 percentage points per year until it
reaches the industry average of 5 percent dividend growth, after
which the company will keep a constant growth rate forever. If the
stock price is $54.50, what required return must investors be
demanding on the company's stock? (Hint: Set up the valuation
formula with...

Storico Co. just paid a dividend of $1.30 per share. The company
will increase its dividend by 20 percent next year and then reduce
its dividend growth rate by 5 percentage points per year until it
reaches the industry average of 5 percent dividend growth, after
which the company will keep a constant growth rate forever. If the
stock price is $32.69, what required return must investors be
demanding on the company's stock? (Hint: Set up the
valuation formula with...

Storico Co. just paid a dividend of $2.15 per share. The company
will increase its dividend by 24 percent next year and then reduce
its dividend growth rate by 6 percentage points per year until it
reaches the industry average of 6 percent dividend growth, after
which the company will keep a constant growth rate forever. If the
stock price is $43.99, what required return must investors be
demanding on the company's stock? (Hint: Set up the valuation
formula with...

Storico Co. just paid a dividend of $3.15 per share. The company
will increase its dividend by 20 percent next year and then reduce
its dividend growth rate by 5 percentage points per year until it
reaches the industry average of 5 percent dividend growth, after
which the company will keep a constant growth rate forever. If the
stock price is $54.50, what required return must investors be
demanding on the company's stock? (Hint: Set up the valuation
formula with...

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 4 minutes ago

asked 5 minutes ago

asked 15 minutes ago

asked 23 minutes ago

asked 45 minutes ago

asked 55 minutes ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 2 hours ago

asked 2 hours ago