Question

2. Calculate the price of the following stock: a. Quark Inc. just paid a dividend of...

2. Calculate the price of the following stock:

a. Quark Inc. just paid a dividend of $3.00 and the growth rate of dividends is going to continue at a rate of 5% indefinetely. The required rate of return is 12%. What is today's stock price and the price 1 year from now

b. Higgey Corp's stock just paid a $3.00 dividend. The dividend is going to experience a growth rate of 15% for 2 years and then settle to an indefinite growth rate of 6% indefinetely. IF the expected rate of return is 12%, what is the price of the stock today.

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Answer #1

Answer 2-a.

Recent Dividend, D0 = $3.00
Growth Rate, g = 5%
Required Return, rs = 12%

D1 = D0 * (1 + g)
D1 = $3.00 * 1.05
D1 = $3.15

Current Price, P0 = D1 / (rs - g)
Current Price, P0 = $3.15 / (0.12 - 0.05)
Current Price, P0 = $45.00

Price in 1 year, P1 = P0 * (1 + g)
Price in 1 year, P1 = $45.00 * 1.05
Price in 1 year, P1 = $47.25

Answer 2-b.

Recent Dividend, D0 = $3.00

Growth rate for next 2 years is 15% and a constant growth rate (g) of 6% thereafter

D1 = $3.00 * 1.15 = $3.45
D2 = $3.45 * 1.15 = $3.9675
D3 = $3.9675 * 1.06 = $4.20555

Required Return, rs = 12%

P2 = D3 / (rs - g)
P2 = $4.20555 / (0.12 - 0.06)
P2 = $70.0925

P0 = $3.45/1.12 + $3.9675/1.12^2 + $70.0925/1.12^2
P0 = $62.12

Current price = $62.12

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