Volbeat, Inc. pays an annual dividend on its common stock that is expected to gr

Question

Volbeat, Inc. pays an annual dividend on its common stock that is expected to grow by 4 percent a year forever. The dividend in one year will be $2.35. If the expected return on the stock is 11.5 percent per year, what is the price of the stock today? Wildernest, Inc. pays an annual dividend on its common stock that is expected to grow by 2.4 percent a year forever. The dividend in one year will be $1.30. If the expected return on Wildernests common stock is 12.6 percent per year, what is the price of the stock to be in four years? The expected return of Langhorn stock is 9.5 percent. The company will pay the following dividends: $2.40 in one year, $2.80 in two years, and $3.20 in three years. After the dividend is paid in three years, the dividend is expected to grow by 4.6 percent a year forever. What is the current price of one share of stock? The expected return of Langhorn stock is 9.5 percent. The company will pay the following dividends: $2.40 in one year, $2.80 in two years, and $3.20 in three years. After the dividend is paid in three years, the dividend is expected to grow by 4.6 percent a year forever. What is the current price of one share of stock? Which one of the following statements is false? a. A common approximation is to assume that in the long run, dividends will grow at a constant rate. b. The value of a stock is equal to the present value of both the dividends and future sales price of that stock which will be received by an investor. c. There is a tremendous amount of certainty associated with the forecast of a firms future dividends. d. According to the constant dividend growth model the value of the firm depends on the current dividend level divided by the required return minus the growth rate. select here

Explanation / Answer

1)

Dividend after a Year (D1)            =             $ 2.35

Dividend Growth Rate (g)            =             4.00 %

Expected Return (r)                        =             11.5 %

Keeping all the information in Dividend Discount model to calculate fair Price (P)

P= D1/r-g

P= $2.35 / 11.5% - 4.00 %

P = $ 31.33

2)

Dividend after a Year                      =             $ 1.30

                Dividend After 4 Yr.         =             $ 1.30 * (1+2.40%)^3 (adding growth rate for another three year)

                Hence D1                             =             $ 1.395

Dividend Growth Rate (g)            =             2.40 %

Expected Return (r)                        =             12.6 %

Keeping all the information in Dividend Discount model to calculate fair Price (P)

P= D1/r-g

P= $1.395 / 12.6% - 2.40 %

P = $ 13.68

3)

Dividend in fourth Year (D1)                                        =             $ 3.20

Dividend Growth Rate after three year (g)          =             4.60 %

Expected Return (r)                                                        =             9.5 %

Keeping all the information in Dividend Discount model to calculate fair Price (P) after three year

P= D1/r-g

P= $3.20 / 9.5% - 4.60 %

P = $ 65.31

Now calculate present value of future dividend and stock price

Dividend after a year =                                  $ 2.40

Dividend after two year =                            $ 2.80

And stock price after three year=             $ 65.31

Present value    =             54.07

4)

Answer is C.

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