A stock has just paid a dividend of $10 per share. The required rate of return i

Question

A stock has just paid a dividend of $10 per share. The required rate of return is 17%, and the expected constant growth rate is 7%. What is the stock's expected price?

Select one:

a. $105.22

b. $106.75

c. $109.84

d. $110.29

e. $107

Suppose that a company has a major change in its investment policy and as a consequence, the beta of its common stock decreases. Assuming that other factors remain constant, will this change raise or lower the expected price of the stock?

Select one:

a. lower

b. Raise

PPLG Company just paid a dividend of $3 per share. You believe that the dividend growth rate will be 10% for the next two years and the selling price of the stock will be $45 at the end of year 2. What is the maximum price you are willing to pay for the stock if you require a 15% return?

Select one:

a. $41.08

b. $37.71

c. $39.64

d. $38.28

e. $36.41

Explanation / Answer

1)

What is the stock's expected price

=dividend in year 1/(required rate of return-expected constant growth rate)

=(10*(1+7%))/(17%-7%)

=107

2)

b. raise

because lower beta will reduce the required return, so the present value of future dividends rises.

3)

What is the maximum price you are willing to pay

=(3*1.10)/(1+15%)^1+(3*1.10^2)/(1+15%)^2+45/(1+15%)^2

=39.64

the above is answer..

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