Question

Q12. Stock Valuation: Cape Corp. will pay a dividend of $2.64 next year. The company has stated that it will maintain a constant growth rate of 4.5 percent a year forever. If you want a return of 12 percent, how much will you pay for the stock? What if you want a return of 8 percent? What does this tell you about the relationship between the required return and the stock price? Dividend paid Dividend growth rate Required return Required return Output area: Price at required of 0 percent Price at required of 0 percent All else constant, a higher required return means that the stock will sell for a lower price.

Answer 1

Dividend paid Dividend growth rate Required return Required return $ 2.64 4.5% 12% 8% Price at required 12 percent $35.20 =2.64/(12%-4.5%) Price at required 8 percent $75.43 =2.64/(8%-4.5%)

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