A stock you are evaluating just paid an annual dividend of $2.70. Dividends have grown at...
A stock you are evaluating just paid an annual dividend of
$2.70. Dividends have grown at a constant rate of 2.4 percent over
the last 15 years and you expect this to continue.
a. If the required rate of return on the stock is
12.8 percent, what is its fair present value?
b. If the required rate of return on the stock is
15.8 percent, what should the fair value be four years from
today?
(For all requirements, do not round intermediate
calculations. Round your answers to 2 decimal places. (e.g.,
32.16))
Homework Answers
a.Present value=D1/(Required return-Growth rate)
=(2.7*1.024)/(0.128-0.024)
=$26.58(Approx).
b.Present value=D1/(Required return-Growth rate)
=(2.7*1.024)/(0.158-0.024)
=$20.63283582
Hence P4=Present value*(1+Growth Rate)^4
=$20.63283582*(1.024)^4
=$22.69(Approx).
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