Question

 Over the past 6​ years, Elk County Telephone has paid the dividends shown in the following​ table,

LOADING...

. The​ firm's dividend per share in

20202020

is expected to be

​$8.368.36.

a.  If you can earn

1111​%

on​ similar-risk investments, what is the most you would be willing to pay per share in

20192019​,

just after the

​$8.118.11

​dividend?

b.  If you can earn only

88​%

on​ similar-risk investments, what is the most you would be willing to pay per​ share?

c.  Compare your findings in parts a and ​b, what is the impact of changing risk on share​ value?

Year	Dividend per share
20192019	​$8.118.11
20182018	​$7.887.88
20172017	​$7.657.65
20162016	​$7.437.43
20152015	​$7.217.21
20142014	​$7.00

Answer 1

Annual average growth rate

=((last value/First value)^(1/Time between 1st and last value)-1)*100

=((8.36/8.11)^(1/1)-1)*100

Annual Growth rate% = 3.0

a.

As per DDM

Price = recent dividend* (1 + growth rate )/(cost of equity - growth rate)

Price= 8.36/ (0.11 - 0.03)

Price= 104.5

b.

As per DDM

Price = recent dividend* (1 + growth rate )/(cost of equity - growth rate)

Price= 8.36/ (0.08 - 0.03)

Price= 167.2

c.

As risk for the stock decreases price increases as seen from answers in a. and b.