Question

SPRING 2019 PAGE 2 4. (5 points) O Find the price of a stock that has a constant growth rate of 6%, a current dividend of $4.5, and a required return of 11% What would be the growth rate if the price of the stock was $120/share, the same current dividend of $4.5, and a 14% required return? If the P/E ratio is 14, projected camnings for the firm are $4/share, and the dividend is going to be $3/share what is the expected price? O For the stock in part 1, what is the expected capital gains yield? What is the expected dividend yield?

Answer 1

1.

Current Dividend = D0 = $4.5

Growth in dividend = g = 6%

Dividend Next Period = D1 = D0(1+g) = 4.5(1+0.06) = $4.77

Required Return = r = 11%

Price of Stock = P0 = D1/(r - g) = 4.77/(0.11 - 0.06) = $95.4

2.

Let growth rate be g

Current Dividend = D0 = $4.5

Dividend Next Period = D1 = D0(1+g) = 4.5(1+g)

Required Return = r = 14%

Price of Stock = P0 = D1/(r - g)

=> 120 = 4.5(1+g) / (0.14 - g)

=> 120(0.14 - g) = 4.5(1+g)

=> g = (120*0.14 - 4.5)/(4.5 + 120) = 0.0988 or 9.88%