Question

1) A stock just paid a dividend of $0.50. If the dividend is expected to grow...

1) A stock just paid a dividend of $0.50. If the dividend is expected to grow 3% per year, what will the price be if the required return is 9%?

2) A stock is expected to pay a dividend of $1 at the end of the year. The required rate of return is 11%, and the expected growth rate is 5%. What is the current stock price?

3) A stock just paid a dividend of $1. The required rate of return is 11%, and the growth rate is 5%. What is the current stock price?

4) Mark Walker Inc. plans to issue preferred stock with a perpetual annual dividend of $1.5 per share. If the required return on this stock is currently 7%, what should be the stock’s market value?

5) A share of common stock has just paid a dividend of $2.00. If the expected long-run growth rate for this stock is 7%, and if investors require an 11% rate of return, what is the price of the stock?

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Homework Answers

Answer #1

1)

Price = D1 / required rate - growth rate

Price = (0.5 * 1.03) / 0.09 - 0.03

Price = 0.515 / 0.06

Price = $8.58

2)

Current price = D1 / required rate - growth rate

Current price = 1 / 0.11 - 0.05

Current price = 1 / 0.06

Current price = $16.67

3)

Price = D1 / required rate - growth rate

Price = (1 * 1.05) / 0.11 - 0.05

Price = 1.05 / 0.06

Price = $17.5

4)

Stock's market value = Annual dividend / required rate

Stock's market value = 1.5 / 0.07

Stock's market value = $21.43

5)

Price = D1 / required rate - growth rate

Price = (2 * 1.07) / 0.11 - 0.07

Price = 2.14 / 0.04

Price = $53.5

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