Question

True or false

16) If the stock pays a $2 dividend forever and investors want a 20% return the stock's price $15

17) If the stock above stops paying dividends after 10 years, its price >$10

18) If dividends were $5 in 2015 and $6 in 2020 the dividend growth >5%

19) If a $1 dividend grew annually at 4% forever ad investors wanted a 10% return, the stock price <$20

20) If a stock last paid a $4 dividend that will grow annually at 4% and currently sells for $40, the shareholder's return >15%

Answer 1

16. Stock price=Dividend1/rate of return=$2/20%=$10

False

17. This can be found by using NPV function in EXCEL

Stock price=NPV(rate,Year1 to Year4 cashflows)

Stock price=NPV(20%,Year1 to Year4 cashflows)

Stock Price=$8.38 which is lower than 10 (<)

False

rate	20%
D1	2
D2	2
D3	2
D4	2
D5	2
D6	2
D7	2
D8	2
D9	2
D10	2
Stock price	8.38

18.The annual growth needs to be calculated using the formula=((FV/PV)^(1/n))-1

=((6/5)^(1/5))-1

=3.71% lower than 5% (<)

False

19. Stock price=Dividend1/(required rate-growth rate)

=$1/(10%-4%)

=$16.67 which is lower than 20

True

20. Shareholder's return=(Dividend1/Share price)+growth rate

Dividend1=Dividend just paid*(1+4%)=4*(1+4%)=4.16

Shareholder's return=(4.16/40)+4%=10.4%+4%=14.4% is lower than 15% (<)

False