Question

5. A company just paid a dividend of $7 and expects the dividend to decrease 10% this year, decrease 20% next year and then grow at a constant rate of 5% thereafter. If your required rate of return for the company is 10%, what is the per share value today? A. $83.45 B. $86.25 C. $97.36 D. $98.14 E. $100.456.

6. A company just paid a dividend of $1.50 and expects high growth of 20% the next two years and then constant growth of 5% thereafter. If the required rate of return associated with this stock is 12%, what is the value of the stock today? A. $30.30 B. $29.16 C. $21.70 D. $22.68 E. $18.06

Answer 1

5. The share value is computed as shown below:

1st year dividend is computed as follows:

= $ 7 - 10%

= $ 6.30

2nd year dividend is computed as follows:

= $ 6.30 - 20%

= $ 5.04

3rd year dividend is computed as follows:

= $ 5.04 + 5%

= $ 5.292

So the stock price will be as follows:

= $ 6.30 / 1.10 + $ 5.04 / 1.10² + 1 / 1.10² x [ $ 5.292 / ( 0.10 - 0.05 ) ]

= $ 97.36 Approximately

So the correct answer is option C i.e. $ 97.36

6. The stock price is computed as follows:

1st year dividend is computed as follows:

= $ 1.50 + 20%

= $ 1.80

2nd year dividend is computed as follows:

= $ 1.80 + 20%

= $ 2.16

3rd year dividend is computed as follows:

= $ 2.16 + 5%

= $ 2.268

So the stock price will be as follows:

= $ 1.80 / 1.12 + $ 2.16 / 1.12² + 1 / 1.12² x [ $ 2.268 / ( 0.12 - 0.05 ) ]

= $ 29.16 Approximately

So the correct answer is option B i.e. $ 29.16

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