#3. Samson Enterprises increases its annual dividend by 2 percent per year. The

Question

#3. Samson Enterprises increases its annual dividend by 2 percent per year. The common stock has a market price of $36.20 a share on a required return of 13 percent. How much did the company last pay as a dividend (i.e. D0)?

#4. Due to ongoing capital investments, Lounge Lizards, Inc. doesn

Samson Enterprises increases its annual dividend by 2 percent per year. The common stock has a market price of $36.20 a share on a required return of 13 percent. How much did the company last pay as a dividend (i.e. D0)? Due to ongoing capital investments, Lounge Lizards, Inc. doesn't currently pay any dividends. However, four years from now, the firm will pay a $2.50 dividend, and its dividend payment will then increase each year by 5% until perpetuity. If you use a discount rate of 10%, calculate the maximum you would want to pay for the firm's stock today.

Explanation / Answer

3. g = 2%
P0 = 36.20
Ks = 13%

Using Gordon Model, we have P0=D0*(1+g)/(Ks-g)

So D0 = P0*(Ks-g)/(1+g) = 36.20*(13%-2%)/(1+2%) = $3.90

4. Do=D1=D2=D3 =0
D4 = 2.50
g = 5%
Ks = 10%
What is P0

Horizon Value at P4=D4*(1+g)/(Ks-g)
= 2.50*(1+5%)/(10%-5%)
= $52.50

So P0 = D1/(1+Ks)^1 + D2/(1+Ks)^2+D3/(1+Ks)^3+D4/(1+Ks)^4+ P4/(1+ks)^4
= 0+0+0+ 2.50/(1+10%)^4 + $52.50/(1+10%)^4 = $35.86
= $37.57

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