Question

4. Suppose that a stock is expected required return on equity investmen a. Using a one-period mod scur on equity investments is 9% (10 po pected to pay a $1 dividend at the end of this year and that your if you es ou expect to sell it in one year for $17.50? model of the stock price determination, what would you pay for the stock Suppose the dividend next year expected to grow at a constant 1. end next year is 5% higher than this year, and after that the dividend w at a constant 1.5% per year into perpetuity. Using the Gordon growth model, what would you pay for the stock today

Answer 1

Answer (6) Di - Do (Itg) = 1(1+0.05) = $ 105 growth Rok = 'g' = 1.5% per year perpetuity Asper Gordon's Growth Model Po Di Ke-g Ke Required Rote of Return g growth Rote ; D = Next Expected Dividend Po= 1.05 0.09 -0.015 Thus, Price of stock as on today is $14

(6) Price of stock as on todoy con be colculeted using the discounting Technique ie Cash flows to be received at the end of this yoor shall be discounted using Required rate of Return on Equity Investment (ie. 9%) Amount Expected to be Received at the end of yooral & Dividend plus Sales Proceeds 1 + 17.50 - $ 18.50 ice of stock as on today = 18.50 18.50 I Rate of Rotum (1+0.09) on Equity $16.97