Question

63; $65.00

$61; $65.25

$60; $64.75

$62.50; $70.00

McDonald’s Corporation announced an increase of their quarterly dividend from $0.55 to $0.61 per share in September 2010. This continued a long string of dividend increases. McDonald’s was one of a few companies that had managed to increase its annual dividend at a double-digit clip for many years, including through the financial crisis and recession from 2007-2009.. Suppose you want to use the dividend growth model to value McDonald’s stock. You believe that dividends will grow at 7 % per year indefinitely, and you think the market’s required return on this stock is 11 %. Let’s simplify by assuming that McDonald’s pays dividends annually and that the next annual dividend is expected to be $2.44 per share. The dividend will arrive in exactly one year. What would you pay for McDonald’s stock right now? Suppose you buy the stock today, hold it just long enough to receive the next dividend, and then sell it. What rate of return will you earn on that investment?

A. Value of stock today

B. If you buy stock today at the above price and next year you receive a $2.44 div then you sell the stock. At what price will the stock sell one year from now? The next dividend will be 7% higher than the last one:

Answer 1

Share Price Today
Next year dividend	2.4400
Rate of return	11.00%
Growth Rate	7%
Present value of all dividends til infinity at year 4
	=Next Dividend /(Rate of return-Growth Rate)
	=2.44/(0.11-0.07)
	61.00
Share Price after one year
Next year dividend	=2.44*107%	2.6108
Rate of return	11.00%
Growth Rate	7%
Present value of all dividends
	=Next Dividend /(Rate of return-Growth Rate)
	=2.6108/(0.11-0.07)
	65.27
Return in 1 year
Initial Investment	61.00
Selling price	65.27
Capital gain	4.27
Dividend income	2.44
Total Return (dividend + Cap Gain)	6.71
Percentage return=	6.71*100/61
Percentage return=	11.00%