Question

A.

The James Clothing Co. pays a constant annual dividend of $4.00 per share. What is one share of this stock worth to you today if you require a 27 percent rate of return?

B.

LB Moore has 33,000 shares of common stock outstanding. The firm just paid an annual dividend of $2.00 per share on this stock. The market rate of return is 16.00 percent. What will one share of this stock be worth one year from now if the dividends grow by 4.60 percent annually?

C.

Alberto Trucking is expected to pay an annual dividend of $2.70 per share next year. The stock is currently selling for $34.50 a share. What is the expected total return on this stock if that return is equally divided between a dividend yield and a capital gains yield?

Answer 1

Answer A.

Annual Dividend = $4.00
Required Return = 27%

Current Price = Annual Dividend / Required Return
Current Price = $4.00 / 0.27
Current Price = $14.81

So, current worth per share is $14.81

Answer B.

Current Dividend, D0 = $2.00
Rate of Return, r = 16.00%
Growth Rate, g = 4.60%

D2 = D0 * (1 + g)^2
D2 = $2.00 * 1.046^2
D2 = $2.1882

P1 = D2 / (r - g)
P1 = $2.1882 / (0.16 - 0.046)
P1 = $2.1882 / 0.114
P1 = $19.19

So, price per share after 1 year is $19.19