Question

King Waterbeds has an annual cash dividend policy that raises the dividend each year by 6​%. The most recent​ dividend, Div0​, was $ 0.45 per share. What is the​ stock's price if:

a. an investor wants a return of 7%

b. an investor wants a return of 10 %

c. an investor wants a return of 11%

d. an investor wants a return of 15%

e. an investor wants a return of 17%

Answer 1

	P0 =	Price of Share
	D1 =	Current Dividend
	Ke =	Cost of Equity
	g =	growth rate
	D1 =	D0* (1 + g)
	D1 =	0.45* (1 + 6.00%)
	D1 =	0.4770
a)	P0 =	D1 / (Ke - g)
	P0 =	0.4770 / (7%- 6%)
	P0 =	47.70
b)	P0 =	D1 / (Ke - g)
	P0 =	0.4770 / (10%- 6%)
	P0 =	11.93
c)	P0 =	D1 / (Ke - g)
	P0 =	0.4770 / (11%- 6%)
	P0 =	9.54
d)	P0 =	D1 / (Ke - g)
	P0 =	0.4770 / (15%- 6%)
	P0 =	5.30
e)	P0 =	D1 / (Ke - g)
	P0 =	0.4770 / (17%- 6%)
	P0 =	4.34