Question

A stock pays dividends of $1.00 at t = 1.  (D1 is provided here, not D0)    It...

A stock pays dividends of $1.00 at t = 1.  (D1 is provided here, not D0)    It is growing at 25% between t =1 and t = 2, after which the growth rate drops to 12%, and will continue at that rate into the future. If the discount rate for this stock is 14%, what should be the value of the stock at t = 0? Hint: Make a diagram indicating ranges of the growth rates and the resulting dividends.

$53.04

$21.74

$55.70

$58.41

$61.16

Homework Answers

Answer #1

Dividend at year 1 = 1

Dividend at year 2 = 1 * 1.25 = 1.25

Dividend at year 3 = 1.25 * 1.12 = 1.4

Present value at year 2 using dividend discount model = D1 / required rate - growth rate

Present value at year 2 = 1.4 / 0.14 - 0.12

Present value at year 2 = 1.4 / 0.02

Present value at year 2 = 70

Present value of 70 today = 70 / ( 1 + 0.14 )2

Present value of 70 today = $53.86273

Present value of year 2 dividend = 1.25 / ( 1 + 0.14)2

Present value of year 2 dividend = $0.9618

Present value of year 1 dividend = 1 / ( 1 + 0.14)

Present value of year 1 dividend = 0.87719

Value of stock = 0.87719 + 0.9618 + 53.86273

Value of stock = $55.70

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
A stock pays dividends of $1.00 at t = 1 (t = 1 NOT t =...
A stock pays dividends of $1.00 at t = 1 (t = 1 NOT t = 0).   Dividends are expected to grow at a constant rate of 16% into the future. With a discount rate of26%, what should the price of the stock be at t = 1?   (price needed for t =1 NOT t = 0) (hint: there is more than one way to do this problem) $11.20 $11.40 $11.60 $11.80 $12.00
A share of common stock pays dividends with a constant growth rate as D0=${div0}, D1= $2.08,...
A share of common stock pays dividends with a constant growth rate as D0=${div0}, D1= $2.08, D2= $2.1632, …. The trend of dividend payments continues indefinitely. Suppose the return on the stock market is 8.2%, the return on the risk free assets is 3%, and the company’s beta is 1. Compute the value of this stock. Note that you should round off your answer at two decimal points. For example, 23.4567 = 23.46
if your stock paying annual dividends will pay a dividend d1 at t=1 of 1.47 and...
if your stock paying annual dividends will pay a dividend d1 at t=1 of 1.47 and have a growth rate of 11% between t=1 and t=2 and with a constant growth rate of 4% thereafter into the future, what should be the value of the stock at t=0 if the expected rate of return for the stock is 7%?
Hames conventioneers inc currently (d0) pays a $2.40 common stock dividend. Dividends have been recently growing...
Hames conventioneers inc currently (d0) pays a $2.40 common stock dividend. Dividends have been recently growing at a 15% annual rate and are expected to continue growing at this rate for the next 3 years, then at 10% rate for the next two years, and thereafter at a 5% rate into the foreseeable future. What is the current value of hames conventioneer's common stock to an investor requiring a 18 percent rate of return?
If your stock paying annual dividends will pay a dividend D1 at t=1 of $1.93 and...
If your stock paying annual dividends will pay a dividend D1 at t=1 of $1.93 and have a growth rate of  10% between t=1 and t=2, and with a constant growth rate of 4% thereafter into the future, what should be the value of the stock at t=0 if the expected rate of return for the stock is 8%?  Notice that in this problem, expected dividends are given at t = 1, not t = 0! Answer to the nearest cent as...
25.If your stock paying annual dividends will pay a dividend D1 at t=1 of $1.06 and...
25.If your stock paying annual dividends will pay a dividend D1 at t=1 of $1.06 and have a growth rate of  11% between t=1 and t=2, and with a constant growth rate of 5% thereafter into the future, what should be the value of the stock at t=0 if the expected rate of return for the stock is 7%? Notice that in this problem, expected dividends are given at t = 1, not t = 0! Answer to the nearest cent...
Q8 9.If your stock paying annual dividends will pay a dividend D1 at t=1 of $1.57...
Q8 9.If your stock paying annual dividends will pay a dividend D1 at t=1 of $1.57 and have a growth rate of  11% between t=1 and t=2, and with a constant growth rate of 5% thereafter into the future, what should be the value of the stock at t=0 if the expected rate of return for the stock is 7%? Notice that in this problem, expected dividends are given at t = 1, not t = 0! Answer to the nearest...
F.E 9.If your stock pays a dividend D0 = $0.75 at t = 0.and will experience...
F.E 9.If your stock pays a dividend D0 = $0.75 at t = 0.and will experience a constant growth of 6.4 percent forever into the future, what should be the price of the stock if the required return for such stocks is 10.5 percent? Note: The dividend shown above is at t = 0, not t=1.    Answer to the nearest cent, xxx.xx and enter without the dollar sign. 10.What is the price of a 13-year bond paying 9.5% annual coupons with...
9. Greenwell Company’s EPS was $7.10 in 1999 and $4.20 in 1994.The company pays out 40%...
9. Greenwell Company’s EPS was $7.10 in 1999 and $4.20 in 1994.The company pays out 40% of its earnings as dividends, and the stock sells for $44. 1) Calculate the past growth earnings, 2) Calculate the next expected dividends per share, D1. (D0 = 0.40($7.10) = $2.84). Assume that the past growth rate will continue. 3) What is the cost of retained earnings, rr, for Greenwell Company?
Radon Homes' current EPS is $7.30. It was $4.28 5 years ago. The company pays out...
Radon Homes' current EPS is $7.30. It was $4.28 5 years ago. The company pays out 50% of its earnings as dividends, and the stock sells for $34. a) Calculate the historical growth rate in earnings. (Hint: This is a 5-year growth period.) Do not round intermediate calculations. Round your answer to two decimal places. ____% b) Calculate the next expected dividend per share, D1. (Hint: D0 = 0.50($7.30) = $3.65.) Assume that the past growth rate will continue. Do...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT