Question

1. Suppose a stock is expected to pay a $1.00 dividend every month and the required return is 9% with monthly compounding. What is the price?

2. The News Company is expected to pay a dividend of $10 next period and dividends are expected to grow at 9% per year. The required return is 18%. What is the current price?

3. Suppose a stock is expected to pay a $1.00 dividend every month and the required return is 9% with monthly compounding. What is the price?

Answer 1

Q-1) Expected Dividend per month = $1

Required return is 9% with monthly compounding, so Monthly Required return = 9%/12 = 0.75%

Calculating the Price of perpetual Dividend:-

Price = Expected Dividend per month/Monthly Required return

Price = $1/0.75%

Price = $133.33

Q-2) Expected Dividend next period(D1) = $10

Growth rate of dividend(g) = 9%

Required return(ke) = 18%

Calculating the Current pirce using Dividend Growth model:-

Price = D1/(ke-g)

Price = $10/(0.18-0.09)

Price = $111.11

Q3 is exactly same as Q-1

If you need any clarification, you can ask in comments.    

If you like my answer, then please up-vote as it will be motivating