Question

The OWB Company paid $2.1 of dividends this year. If its dividends are expected to grow...

  1. The OWB Company paid $2.1 of dividends this year. If its dividends are expected to grow at a rate of 3 percent per year, what is the expected dividend per share for OWB five years from today?
  1. The current price of ABC stock is $35 per share. If ABC’s current dividend is $1.5 per share and investors ‘required rate of return is 10 percent, what is the expected growth rate of dividends for ABC. Use constant dividend growth model.
  1. Consider each of the following stocks, and solve for the missing element:

Stock

Current Year Dividend

Expected Dividend Growth

Required Rate or Return

Price of Stock

A

$1.50

5.0%

8.0%

B

4.0%

6.0%

$26.00

C

$2.00

10.0%

$31.00

D

$0.75

3.0%

$9.75

E

$1.10

6.0%

10.0%
  1. Identify the relation between a stock’s price and the factors that determine the price, based on the constant-growth dividend valuation model:

For example, the relationship is positive if an increase in the factor results in an increase in the share price.

Relationship with share price

Factor

Positive or negative

Current Dividend

Growth rate of dividends

Required Rate or Return
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Homework Answers

Answer #1

1.

=2.1*1.03^5=2.43447555603

2.

35=1.5*(1+g)/(10%-g)
=>g=5.47940845643939%

3.

Stock Current Year Dividend Expected Dividend Growth Required Rate or Return Price of Stock
A $1.50 5.00% 8.00% $52.50
B $0.50 4.00% 6.00% $26.00
C $2.00 3.33% 10.00% $31.00
D $0.75 3.00% 10.92% $9.75
E $1.10 6.00% 10.00% $29.15
Stock Current Year Dividend Expected Dividend Growth Required Rate or Return Price of Stock
A $1.50 5.00% 8.00% $52.50
B $0.50 4.00% 6.00% $26.00
C $2.00 3.33% 10.00% $31.00
D $0.75 3.00% 10.92% $9.75
E $1.10 6.00% 10.00% $29.15
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