Question

King Waterbeds has an annual cash dividend policy that raises the dividend each year by 5?%. The most recent? dividend, Div 0?, was $ 0.40 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 13?%?

e. an investor wants a return of 17?%?

Answer 1

This question requires an application of constant growth dividend discount model, according to which value of shares today, V₀ is mathematically represented as:

D₁ = D₀ * (1 + g) = 0.40 * (1 + 5%) = $0.42

a. an investor wants a return of 7?%

V₀ = $21

b. an investor wants a return of 9?%

V₀ = $10.5

c. an investor wants a return of 11?%

V₀ = $7

d. an investor wants a return of 13?%

V₀ = $5.25

e. an investor wants a return of 17?%

V₀ = $3.5