Question

King Waterbeds has an annual cash dividend policy that raises the dividend each year by

6​%.

The most recent​ dividend,

Div0​,

was

$0.50

per share. What is the​ stock's price if

a.  an investor wants a return of

7​%?

b.  an investor wants a return of

9​%?

c.  an investor wants a return of

11​%?

d.  an investor wants a return of

12​%?

e.  an investor wants a return of

19​%?

Answer 1

The price is computed as follows:

= [ D0 x (1 + growth rate) / (required rate of return - growth rate)

a. The price will be as follows:

= [ $ 0.50 x 1.06 ] / (0.07 - 0.06)

= $ 53

b. The price will be as follows:

= [ $ 0.50 x 1.06 ] / (0.09 - 0.06)

= $ 17.67

c. The price will be as follows:

= [ $ 0.50 x 1.06 ] / (0.11 - 0.06)

= $ 10.60

d. The price will be as follows:

= [ $ 0.50 x 1.06 ] / (0.12 - 0.06)

= $ 8.83

e. The price will be as follows:

= [ $ 0.50 x 1.06 ] / (0.19 - 0.06)

= $ 4.08

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