Question

King Waterbeds has an annual cash dividend policy that raises the dividend each year by 4​%. The most recent​ dividend, Div 0​, was $ 0.45 per share. What is the​ stock's price if a.  an investor wants a return of 6​%? b.  an investor wants a return of 10​%? c.  an investor wants a return of 11​%? d.  an investor wants a return of 12​%? e.  an investor wants a return of 18​%?

Answer 1

a. Price = Expected Dividend / ( Required Rate of Return - Growth Rate)

= ($ 0.45 *104% ) / ( 6% -4%)

= ($ 0.468) / 2%

= $ 23.40

b.

Price = Expected Dividend / ( Required Rate of Return - Growth Rate)

= ($ 0.45 *104% ) / ( 10% -4%)

= ($ 0.468) / 6%

= $ 7.80

c.

Price = Expected Dividend / ( Required Rate of Return - Growth Rate)

= ($ 0.45 *104% ) / ( 11% -4%)

= ($ 0.468) / 7%

= $ 6.69

d.

Price = Expected Dividend / ( Required Rate of Return - Growth Rate)

= ($ 0.45 *104% ) / ( 12% -4%)

= ($ 0.468) / 8%

= $ 5.85

e.

Price = Expected Dividend / ( Required Rate of Return - Growth Rate)

= ($ 0.45 *104% ) / (18% -4%)

= ($ 0.468) / 14%

= $ 3.34