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a
a. A corporation is expected to pay a dividend of $3.36 at the end of the year. The required rate of return is rs = 8.6%. What would the stock's price be if the growth rate were 8.8%?
b. A corporation is expected to pay a dividend of $4.26 at the end of the year. The required rate of return is rs = 11%. What would the stock's price be if the growth rate were -3.5%?
c. If D1 = $4.00, g = 8%, and P0 = $20, what is the Corporation's expected dividend yield, capital gains yield, and total expected return for the coming year?
d. A corporation paid a $0.76 dividend per share in 1976, which grew to $4.58 in 2019. This growth is expected to continue. What is the value of this stock at the beginning of 2020 when the required return is 8.7 percent?
e. A corporation just gave a $6.02 dividend. The dividend is expected to grow by 27% the next year, 21% the year after that, 19% the year after that, 15% the following year, and 6% every year thereafter. If the discount rate is 10%, what should the price of the stock be today?
Expert Solution
a). Computation of the current stock price:-
Current stock price = D1 / (Required return - Growth rate)
= $3.36 / (8.6% - 8.8%)
= $3.36 / -0.2%
= -$1680
b). Computation of the current stock price:-
Current stock price = D1 / (Required return - Growth rate)
= $4.26 / (11% - (-3.5%)
= $4.26 / 14.5%
= $29.38
c). Computation of the expected dividend yield:-
Dividend yield = D1 / P0
= $4 / $20
= 20%
Expected capital gains yield = Growth rate
= 8%
Expected return = Expected dividend yield + Expected capital gains yield
= 20% + 8%
= 28%
d). Computation of the current stock price:-
Annual growth rate = (Dividend in 2019 / Dividend in 1976)^(1/n) -1
= ($4.58 / $0.76) ^ (1/43) - 1
= 1.0427 - 1
= 4.27%
Current stock price = D1 / (Required return - Growth rate)
= $4.58*(1+4.27%) / (8.7% - 4.27%)
= $4.78 / 4.43%
= $107.69
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