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23) If investor required return is 20% and capital gain is 8% how much dividend company should pay? 24) Current price of stock is $20 and expected price after one year is 22
23) If investor required return is 20% and capital gain is 8% how much dividend company should pay? 24) Current price of stock is $20 and expected price after one year is 22.5. If investor required return is 18%. What percentage of dividend should company pay? 25) You own a stock that will start paying $0.50 annually at the end of the year. It has zero growth in future. If the required rate of return is 14%, what should you pay per share? 26) You own a stock that will start paying $0.50 annually at the end of the year. It will then grow each year at a constant annual rate of 5%. If the required rate of return is 14%, what should you pay per share? 1
Expert Solution
23]Required return = Capital gains yield+Dividend yield
Dividend yield = 20%-8% =12.00%
24]Capital gains yield = 22.5/20-1 =12.50%
Dividend yield = Required return-Capital gains yield = 18%-12.5% =5.50%
25]Price per share per DDM [Constant dividend formula] = 0.50/14% =$ 3.57
26]Price per share per DDM [Constant growth formula] = 0.50/(14%-5%) =$ 5.56
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