Question

1. A company pays a $3 dividend on its common stock. This is also expected to be the dividend next year. The second year, the dividend is expected to grow at 10%, then 8% the third year. Thereafter, the dividend will grow at 4% per year. If the required rate of return is 13%, how much would you pay for the stock?

2. A preferred stock pays a $3 dividend each year. The current required rate of return is 15%. What is the most you would pay for the preferred stock?

Answer 1

1

Year	Particulars	Cash flow	× discount rate	Present value
1	Dividend	$      3.0000	0.88496	$      2.65
2	Dividend	$      3.3000	0.78315	$      2.58
3	Dividend	$      3.5640	0.69305	$      2.47
4	Dividend	$      3.9204	0.61332	$      2.40
4	Dividend	$    45.3024	0.61332	$   27.78
Stock price today			$   37.90

Stock price today is 37.90

2

Stock price = 3/15% = $20