Question

Cape Corp. will pay a dividend of $4.20 next year. The company has stated that it will maintain a constant growth rate of 4.5 percent a year forever.
a.	If you want a return of 15 percent, how much will you pay for the stock? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
b.	If you want a return of 11 percent, how much will you pay for the stock? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
	a. Stock price= b. Stock price=

Answer 1

Solution:

Dividend (Next Year) :- $4.20, Constant growth rate = 4.5% p.a.

a) If Required return = 15%, then

Stock Price : (Next Dividend) / (Required Return - Growth Rate)

Stock Price : $ 4.20 / (0.15 - 0.045)

Stock Price : $ 4.20 / 0.105

Stock Price : $ 4.20 / 0.105

Stock Price : $ 40

a) If Required return = 11%, then

Stock Price : (Next Dividend) / (Required Return - Growth Rate)

Stock Price : $ 4.20 / (0.11 - 0.045)

Stock Price : $ 4.20 / 0.105

Stock Price : $ 4.20 / 0.065

Stock Price : $ 64.62

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