Question

Company A just paid a dividend of $1.8 and expects to reduce its dividend at a...

Company A just paid a dividend of $1.8 and expects to reduce its dividend at a constant rate of 5%. If the required rate of return is 20%, what will be the intrinsic value of the stock? What will be the dividend yield and capital growth rate of the stock next year?

Please show all the work.

Homework Answers

Answer #1

Last Dividend, D0 = $1.8
Growth rate, g = -5%
Required Return, r = 20%

Expected Dividend, D1 = D0 * (1+g)
Expected Dividend, D1 = $1.8 * (1-0.05)
Expected Dividend, D1 = $1.71

Intrinsic Value, P0 = D1 / [r - g]
Intrinsic Value, P0 = $1.71 / [0.20 - (-0.05)]
Intrinsic Value, P0 = $1.71 / 0.25
Intrinsic Value, P0 = $6.84

Dividend Yield = D1 / P0
Dividend Yield = $1.71 / $6.84
Dividend Yield = 0.25 or 25%

Capital Growth Rate = Required Return - Dividend Yield
Capital Growth Rate = 20% - 25%
Capital Growth Rate = -5%

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