Stock A is expected to provide a dividend of $11.70 a share forever. Stock B is
ID: 2632674 • Letter: S
Question
Stock A is expected to provide a dividend of $11.70 a share forever.
Stock B is expected to pay a dividend of $6.70 next year. Thereafter, dividend growth is expected to be 6% a year forever.
Stock C is expected to pay a dividend of $4.30 next year. Thereafter, dividend growth is expected to be 22% a year for five years (i.e., until year 6) and zero thereafter.
If the market capitalization rate for each stock is 12%, what is the stock price for each of the stocks? (Do not round intermediate calculations. Round your answers to 2 decimal places.)
Stock A ???
Stock B???
Stock C???
If the market capitalization rate for each stock is 9%, what is the stock price for each of the stocks? (Do not round intermediate calculations. Round your answers to 2 decimal places.)
Stock A????
Stock B???
Stock C???
a.Stock A is expected to provide a dividend of $11.70 a share forever.
b.Stock B is expected to pay a dividend of $6.70 next year. Thereafter, dividend growth is expected to be 6% a year forever.
c.Stock C is expected to pay a dividend of $4.30 next year. Thereafter, dividend growth is expected to be 22% a year for five years (i.e., until year 6) and zero thereafter.
a-1.If the market capitalization rate for each stock is 12%, what is the stock price for each of the stocks? (Do not round intermediate calculations. Round your answers to 2 decimal places.)
Stock A ???
Stock B???
Stock C???
If the market capitalization rate for each stock is 9%, what is the stock price for each of the stocks? (Do not round intermediate calculations. Round your answers to 2 decimal places.)
Stock A????
Stock B???
Stock C???
Explanation / Answer
a.
Capitalization rate
12%
Stock A
Div / r
11.7/.12
97.5
Stock B
Div / (r-g)
6.7/(.12-.06)
111.6667
Stock C
Year
1
2
3
4
5
6
Div
4.3
5.246
6.40012
7.808146
9.525939
11.62165
Value of perpetuity 11.62 (from year 6) at year 5
96.84704
Cash Flow
4.3
5.246
6.40012
7.808146
106.373
PV
3.83928571
4.182079
4.555479
4.962218
60.35889
Sum(Stock C Price)
77.8979482
b.
Capitalization rate
9%
Stock A
Div / r
11.7/.09
130
Stock B
Div / (r-g)
6.7/(.09-.06)
223.3333
Stock C
Year
1
2
3
4
5
6
Div
4.3
5.246
6.40012
7.808146
9.525939
11.62165
Value of perpetuity 11.62 (from year 6) at year 5
129.1294
Cash Flow
4.3
5.246
6.40012
7.808146
138.6553
PV
3.94495413
4.415453
4.942067
5.531488
90.11645
Sum (Stock C price)
108.950412
a.
Capitalization rate
12%
Stock A
Div / r
11.7/.12
97.5
Stock B
Div / (r-g)
6.7/(.12-.06)
111.6667
Stock C
Year
1
2
3
4
5
6
Div
4.3
5.246
6.40012
7.808146
9.525939
11.62165
Value of perpetuity 11.62 (from year 6) at year 5
96.84704
Cash Flow
4.3
5.246
6.40012
7.808146
106.373
PV
3.83928571
4.182079
4.555479
4.962218
60.35889
Sum(Stock C Price)
77.8979482
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