Question

Instruction: In problems which ask you to calculate something, first write out the appropriate formula and then fill in the relevant information that is used to calculate the answers. If you use the time value of money functions of a financial calculator, write down the inputs you use to arrive the answer. Provided that you have used the correct formula and filled in the correct information, you will receive partial to full credit; on the other hand, answers that do not show how you arrive at the final answer will receive little or zero credit. 1. Andante Co. just paid its dividend of $5 per share. The required rate of return of the stock is 13.4%. Assume the current stock value is $100, and the dividend is expected to grow at a constant rate. (a) Find the growth rate of the dividends. (b) Find the expected stock price in a year from now.

Answer 1

1]

a]

current stock value = recent dividend * (1 + g) / (r - g)

where r = required return

g = growth rate

$100 = $5 * (1 + g) / (0.134 - g)

$100 * (0.134 - g) = $5 * (1 + g)

13.4 - 100g = 5 + 5g

105g = 8.4

g = 8%

b]

expected stock price in 1 year = dividend after 1 year * (1 + g) / (r - g)

dividend after 1 year = recent dividend * (1 + g) = $5 * (1 + 8%) = $5.40

expected stock price in 1 year = $5.40 * (1 + 8%) / (13.4% - 8%)

expected stock price in 1 year = $108.00