Question

1. PartyAnimal pays a constant annual dividend of $3.50 a share and currently sells for $54 a share. What is the rate of return?

2. Find the dividend for each of the following years if dividends grow at a constant 4% per year and the most recent dividend paid was $2.60.

A.D3

B.D7

C.D12

3. A company paid a dividend of $1.45 per share at the end of the year. They plan to increase the dividend by 25% year 1, 17% year 2, and 5% a year indefinitely. What are you willing to pay for this stock today if required return is 19%?

4.ChickenPea stock is currently selling for $17 a share. Their most recent dividend was $1.75/share and management just declared a dividend of $1.95. What is the annual growth rate?

Answer 1

Part 1:

Required Ret = COnstant Dividend / Current selling Price

= $ 3.5 / $ 54

= 0.0648 i.e 6.48%

Part 2:

Part 3:

Value of stock = PV of cash flows from it.

Dividend computation:

P2 = D3/ (Ke - g)

= $ 2.227 / (19% - 5%)

= $ 2.227 / 14%

= $ 15.90

P0:

Part 4:

Growth rate = [ Recent announced div / Recenty paid div ] - 1

= [ 1.95 / 1.75 ] - 1

= 1.1143 - 1

= 0.1143 i.e 11.43%