Question

# Varigrowth Inc. just paid a dividend of ?\$1.45 (i.e.,D0=?\$1.45?).Such dividend is expected to grow by 45?%...

Varigrowth Inc. just paid a dividend of ?\$1.45 (i.e.,D0=?\$1.45?).Such dividend is expected to grow by 45?% per year for the next 3? years, after which it is expected to grow at a? long-run rate of 2.5?%. Assuming investors require a 13?% return on the? stock,?

a) What is the price at? t=3? \$---(to the nearest? cent)?

b) What is its price? today???\$---(to the nearest? cent)?

c) What is your total rate of return? (% to two? decimals) if in one year the price is ?\$22.92 and the dividend is ?\$2.03?? --- %

What is your dividend? yield? --- %

What is your capital gain? (loss) yield? --- %

D0 = \$1.45

D1 = \$1.4500 * 1.45 = \$2.1025
D2 = \$2.1025 * 1.45 = \$3.0486
D3 = \$3.0486 * 1.45 = \$4.4205

Constant grow rate, g = 2.5%
Required Return, r = 13%

D4 = \$4.4205 * 1.025 = \$4.5310

P3 = D4 / (r - g)
P3 = \$4.5310 / (0.13 - 0.025)
P3 = \$43.15

So, price at t=3 = \$43.15

P0 = \$2.1025/1.13 + \$3.0486/1.13^2 + \$4.4205/1.13^3 + \$43.15/1.13^3
P0 = \$37.22

So, price today is \$37.22

P0 = \$37.22
P1 = \$22.92
D1 = \$2.03

Rate of Return = (P1 + D1 - P0) / P0
Rate of Return = (\$22.92 + \$2.03 - \$37.22) / \$37.22
Rate of Return = -0.3297
Rate of Return = -32.97%

Dividend Yield = D1 / P0
Dividend Yield = \$2.03 / \$37.22
Dividend Yield = 0.0545
Dividend Yield = 5.45%

Capital Gain (loss) Yield = Rate of Return - Dividend Yield
Capital Gain (loss) Yield = -32.97% - 5.45%
Capital Gain (loss) Yield = -38.42%

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