Question

King Waterbeds has an annual cash dividend policy that raises the dividend each year by 4​%. The most recent​ dividend, Div0​, was $0.40per share. What is the​ stock's price if

a.  an investor wants a return of 7​%?

b.  an investor wants a return of 8​%?

c.  an investor wants a return of 11​%?

d.  an investor wants a return of 12​%?

e.  an investor wants a return of 18​%?

Answer 1

Given,

Div0 = $0.40

Growth rate = 4%

Stock Price = Div0 * (1 + g) / (Ke - g)

Case a: Investor wants a return of 7%.

Stock price = $0.40 * (1.04) / (0.07 - 0.04) = $13.8667 or

Stock price = $13.87 (rounded off to '2' decimals)

Case b: Investor wants a return of 8%.

Stock Price = $0.40 * 1.04 / (0.08 - 0.04) = $10.40

Stock Price = $10.40

Case c: Investor wants a return of 11%.

Stock Price = $0.40 * 1.04 / (0.11 - 0.04) = $5.9429 or

Stock Price = $5.94 (rounded off to '2' decimals)

Case d: Investor wants a return of 12%.

Stock price = $0.40 * 1.04 / (0.12 - 0.04) = $5.20

Stock price = $5.20

Case e: Investor wants a return of 18%.

Stock price = $0.40 * 1.04 / (0.18 - 0.04) = $2.9714 or

Stock price = $2.97 (rounded off to '2' decimals)