Question

Hunter Petroleum Corporation paid a $2 dividend last year. The dividend is expected to grow at a constant rate of 5 percent forever. The required rate of return is 12 percent (this will also serve as the discount rate in this problem). (Use a Financial calculator to arrive at the answers.)

a. Compute the anticipated value of the dividends for the next three years. (Do not round intermediate calculations. Round the final answer to 3 decimal places.)

	Anticipated value
D1	$
D2	$
D3	$

b. Calculate the present value of each of the anticipated dividends at a discount rate of 12 percent. (Do not round intermediate calculations. Round the final answers to 3 decimal places.)

	PV of dividends
D1	$
D2
D3
Total	$

c. Compute the price of the stock at the end of the third year (P₃). (Round intermediate calculations to 2 decimal places. Round the final answer to 2 decimal places.)

P3	=	D4
		Ke − g

(D₄ is equal to D₃ times 1.05)

Price of the stock           $

d. Calculate the present value of the year 3 stock price at a discount rate of 12 percent. (Do not round intermediate calculations. Round the final answer to 3 decimal places.)

Price of the stock (discounted)           $

e. Compute the current value of the stock. (Do not round intermediate calculations. Round the final answer to 2 decimal places.)

Current value           $

f. Use formula given below to show that it will provide approximately the same answer as part e. (Round the final answer to 2 decimal places.)

P0	=	D1
		Ke − g

For formula 10–8, use D₁ = $2.10, K_e = 12 percent, and g = 5 percent. (The slight difference between the answers to parts e and f is due to rounding.)

Current value           $

Answer 1

Ans A)= Past year dividend =2 to calculate dividend growth we need to multiple 1.05 every year till 3rd year. formula= D * (1+growth) ^ n . n= number of year.

D1 = 2*(1.05) = 2.100 D2= 2*(1.05)^2 = 2.2050 D3= 2*(1.05)^3 = 2.3153

Ans B) = Present value for dividend = Dn / (1+ rate of return)^n.    PV of D1= 2.10 / (1+0.12)^1 = 1.8750 , Pv of D2= 2.2050 / (1+0.12)^2= 1.7578 ,    Pv of D3= 2.3153/(1.12)^3= 1.648 .

Ans C) = Price of stock at end of 3 year = D3 * (1 + growth) / (rate of return - growth) . Price at 3rd year = 2.3153 * (1.05) / (0.12 - 0.05) = 34.7295

Ans D) = Present Value (PV) of 3 year price = price of 3rd year / (1+ rate of return) ^ n.

Pv of 3rd year price= 34.7295 / (1+ 0.12)^3 = 24.7198 .