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3.(a): The dividends that a firm pays to its stockholders are expected to grow at 4.5%...

3.(a): The dividends that a firm pays to its stockholders are expected to grow at 4.5% per quarter for the next six quarters. From t=6 onwards, i.e. from the beginning of the seventh quarter the growth rate in dividends will drop to 3% per quarter, and the firm expects to be able to sustain it at this level. Assuming that the market capitalization rate is 3.6% per quarter, work out the price of the firm’s stock assuming that the dividend expected to be paid at t=1, i.e., at the end of the first quarter is $3.00.

    (b): Rework your answer assuming that gH, the rate at which the dividends are expected to grow for the first six quarters is 3.6% per quarter.

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Answer #1

a). Stock price = 536.83

b). Stock price (with first six quarters growth rate of 3.6% per quarter) = 514.48

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