Question

Over the past 6 years, Ell County Telephone has paid the dividends shown in the following table. The firms dividend per share in 2020 is expected to be $9.01.

Proital PihaRe ver the past 6 years, Elk County Telephone has paid the dividends shown in the following t tments, what is the most you would be willing to pay per share in 2019, just after the $8.83 diwidend? nvestments, what is the most you would be willing to pay per share? what is the impact of changing risk on share value? stments, the most you wo Data Table (Click on the icon located on the top-right comer of the data table below in order to copy its contents into a spreadsheet) Year Dividend per share 2019 2018 2017 2016 2015 2014 $8.83 $8.66 $8.49 $8.32 $8.16 $8.00 and then click Check Answ Print Done

a. If you can earn 12% on similiar risk investments, what is the most you would be willing to pay per share in 2019, just after the $8.83 dividend?

b. If you can earn only 9% on similar risk investments, what is the most you would be willing to pay per share?

c. Compare yours findings in par A and B, what is the impact of changing risk on share value?

Answer 1

a)

Stock price (P0)	D1÷(r-g)
Here,
Expected dividend (D1)	$                               9.01	=8.83*(1+2%)
Required return ( r)	12%
Growth rate (g)	2%
Stock price (P0)	$          90.01
	9.01/(12%-2%)

b)

Stock price (P0)	D1÷(r-g)
Here,
Expected dividend (D1)	$                               9.01	=8.83*(1+2%)
Required return ( r)	9%
Growth rate (g)	2%
Stock price (P0)	$        128.55
	9.01/(9%-2%)

c)

Stock price increasing with decrease in stock required return. required return and stock price has inverse relationship.