Question

King Waterbeds has an annual cash dividend policy that raises the dividend each year by 5 %. The most recent dividend, Div0 , was $0.45 per share. What is the stock's price if

a. an investor wants a return of 6%?

b. an investor wants a return of 8%?

c. an investor wants a return of 11%?

d. an investor wants a return of 13%?

e. an investor wants a return of 17%?

Answer 1

Answer (a):

Stock value = Dividend in year 1 / (Required rate of return - Constant growth rate)

= $0.45 * (1 + 5%) / (6% - 5%)

= $47.25

Stock value = $47.25

Answer (b):

Stock value = $0.45 * (1 + 5%) / (8% - 5%)

= $15.75

Stock value = $15.75

Answer (c):

Stock value = $0.45 * (1 + 5%) / (11% - 5%)

= $7.875

= $7.88

Stock value = $7.88

Answer (d):

Stock value = $0.45 * (1 + 5%) / (13% - 5%)

= $5.906

= $5.91

Stock value = $5.91

Answer (e):

Stock value = $0.45 * (1 + 5%) / (17% - 5%)

= $3.9375

= $3.94

Stock value = $3.94