Question

1. Determine the price of a share of stock whose last annual dividend payment (D₀) was $50, assuming a required rate of return of 12% and considering the following:

1. The dividend payment is expected to remain constant (i.e., g = 0) indefinitely.
2. The dividend payment is expected to grow at a constant rate of 3% per year indefinitely.
3. The dividend payment is expected to grow at a rate of 8% for four years and then immediately decline to 3% indefinitely. See formula 9-5 on page 260 of the book.

Answer 1

In the question it is given dividend of $50..But I think it is too high and there is a typo and should be 5 instead of 50..I have solved the questions assuming dividend of 50..But if it is 5 divide all the answers by 10

1.
=50*(1+0%)/(12%-0%)
=$416.66667

2.
=50*(1+3%)/(12%-3%)
=$572.22222

3.
=50*1.08/1.12+50*1.08/1.12*1.08/1.12+50*1.08/1.12*1.08/1.12*1.08/1.12+50*1.08/1.12*1.08/1.12*1.08/1.12*1.08/1.12+50*1.08/1.12*1.08/1.12*1.08/1.12*1.08/1.12*1.03/(12%-3%)
=$677.52141