Question

 This morning you purchased a stock that just paid an annual dividend of $1.70 per share. You require a return of 9.5 percent and the dividend will increase at an annual growth rate of 2.6 percent. If you sell this stock in three years, what will your capital gain be?

 Multiple Choice

 $2.31

 $2.60

 $2.02

 $2.66

 Fowler is expected to pay a dividend of $1.53 one year from today and $1.68 two years from today. The company has a dividend payout ratio of 45 percent and the PE ratio is 17.55 times. If the required return on the company's stock is 10.5 percent, what is the current stock price?

 Multiple Choice

 $58.68

 $53.66

 $25.53

 $46.66

Answer 1

Answer 2

SOLUTION : ONLY FIRST PART :

Current dividend, D0 = 1.70 ($)

Dividend growth rate, g = 2.6 % = 0.026

Market rate of return, r = 9.5 % = 0.095

So, as per Dividend constant growth Discount Model :

Expected price currently, P0 

= D0(1+g) / (r - g) 

= 1.70(1 + 0.026) / (0.095 - 0.026)

= 25.278 ($).

Price expected after 3 years, P3 = 25.278(1 + 0.026)^3 = 27.301 ($)

So, capital gain, if stock is sold in 3 years 

= 27.301 - 25.278 

= 2. 0234 = 2.02 ( $) approx. (ANSWER).