Question

2. Rate of return implied in stock price A corporation has just paid a dividend of $5.00, i.e. Do=$5.00. Due to its growth potential, its dividends are expected to grow at 5% per year starting with the next dividend. If Jerry decides to buy the stock at the current market price $42, what rate of return will he earn? 3. Find the intrinsic value of a share of common stock A corporation has not paid dividend in the past and does not plan to do so for the next year, i.e., D1=0. Due to its growth potential, investors expect the company to start paying dividends in year 2. They expect the dividends for year 2 to year 5 to be $1, $2, $6, and $8 and all the subsequent dividends to growth at 3% annual rate indefinitely. Investors require 12% of return on their Investments as risky as this stock. What is the fair value of the stock today? (Round your calculations to the nearest $0.10.)

Answer 1

1.
=D0*(1+g)/P0+g
=5*(1+5%)/42+5%
=17.5000%

2.
=Present Value of Dividends
=1/1.12^2+2/1.12^3+6/1.12^4+8/1.12^5+8/1.12^5*1.03/(12%-3%)
=62.5243587