(a) XYZ\'s common stock recently paid a dividend of $1.60 in the year just ended

Question

(a) XYZ's common stock recently paid a dividend of $1.60 in the year just ended. Your analysis leads you to conclude that XYZ's dividends and earnings will grow at a rate of 4% indefinitely, and that 10% is a fair required rate of return on the stock. What value would you place on XYZ's common stock?

(b) XYZ's common stock is expected to pay a dividend of $1.60 in the coming year. Your analysis leads you to conclude that XYZ's dividends and earnings will grow at a rate of 4% indefinitely, and that 10% is a fair required rate of return on the stock. What value would you place on XYZ's common stock?

Explanation / Answer

Hi,

Please find the detailed answer as follows:

Part A:

Stock Value = D1/(Ke - g)

D1 = 1.60*(1+.04) [since the dividend of $1.60 was paid last year]

ke = 10%

g = 4%

Stock Value = 1.60*(1+.04)/(10% - 4%) = $27.73

Answer for Part A is $27.73.

----------

Part B:

Stock Value = D1/(Ke - g)

D1 = 1.60 [since the dividend of $1.60 will be paid next year]

ke = 10%

g = 4%

Stock Value = 1.60/(10% - 4%) = $26.67

Answer for Part B is $26.67.

Thanks.

Related Questions

Navigate

• Browse (All)
• Browse #
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.