Question

Test: FIN 301 Exam x > 0133020312.pdf X ® FIN 432 - Investment A X G Get Homework Help W X G Using the formula force "webapps/assessment/take/launch.jsp?course assessment_id=_17709_18_course_id=_25356_1&.content_id=_431107_1&step=null Price today(P.) = Par/(required rate of return on the stock - expected growth rate in dividends) QUESTION 28 Using the formula for determining the value of a constant growth stock, and D=$1.00.r = 10% and g = 5%, the price of the stock today $15 $21 $25 QUESTION 29 If the dividend today is $2.50 and is expected to grow at a constant rate of 4%, the dividend 3 years from now will be ae

Answer 1

28. Option (b) is correct

As per Gordon model, share price is given by:

Share price = D1 / k -g

where, D1 is next years' dividend, k is the required rate of return = 10% and g is the growth rate = 5%

First we will calculate the value of D1.

Dividend will grow at the rate of 5%.So, next years' dividend is:

Current years' dividend = $1

Next years's dividend = $1 * 1.05 = $1.05

Now, putting the values in the Gordon model formula, we get,

Share price = $1.05 / 10% - 5%

Share price = $1.05 / 5% = $21

29. For calculating dividend 3 from now, we will use the below future value formula:

FV = P * (1 + r)ⁿ

where, FV = Future value, which is the dividend after 3 years,  P is current years' dividend = $2.50, r is the rate of interest = 4% and n is 3 years

Now, putting these values in the above formula, we get,

FV = $2.50 * (1 + 4%)³

FV = $2.50 * (1 + 0.04)³

FV = $2.50 * (1.04)³

FV = $2.50 * 1.124864

FV = 2.81.

So, dividend after 3 years is $2.81