Price of the stock = D(1+g) / (r-g)
where D= Dividend, g= growth rate , r = rate of return
a. Buggies are us stock price = 1.52 (1+0) /(11%-0) = $13.82
Steady Freddie Inc. = 1.52(1+7%) /(11%-7%) = $40.66
Gang Buster Group is calculated as below:
Year | Dividend | PVIF11% | Present Value [Dividend * PVIF11%] |
1 | 1.71 | 0.9091 | 1.55 |
2 | 1.92 | 0.8264 | 1.59 |
3 | 2.16 | 0.7513 | 1.62 |
4 | 2.43 | 0.6830 | 1.66 |
Total | 6.42 |
Value of the stock at year 5 = 2.43(1+7%) (11%-7%) = $65.0025
Present value of the stock at the end of 5th year = 65.0025* 0.683 = $44.39
Value of the stock = $44.39+ $6.42 = $50.82 ( rounded off)
b) The correct option is (A).
Assume there are three companies that in the past year paid exactly the same annual dividend...
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