You are considering buying some stock in GrowInc Company. You estimate that next

Question

You are considering buying some stock in GrowInc Company. You estimate that next year's dividend has the following probability distribution:

You anticipate that next year's dividend will grow at a 20% rate for the following three years and then slow to a 5% rate of growth thereafter. The stock of GrowInc is half as risky as the stock market overall, and you expect the stock market as a whole to yield a 10% rate of return.

What do you expect next year's dividend to be?

$ 2.13

What rate of return should you require on a share of GrowInc if the risk-free rate of interest is 4%?

7%

Assume your answers to A and B above are $2.30 and 10%, respectively. How much should you be willing to pay for a share of GrowInc?

$ 66.53

How do you get these answers?

n00 81 VI 122 b253 b000

Explanation / Answer

Answer 1

Dividend => (1.80 * 0.2) + (2.10 * 0.5) + (2.40 * 0.3) => 2.13

now dividend will increase by 20% so correct answer fo next year dividend => $2.56

NOTE: AS LANGUAGE OF QUESTION IS AMBIGUIOS AND NOT CLEAR FROM WHICH YEAR THEY XACTLY WANT 20 % GROWTH, SO CONSIDER 20% GROWTH IN THIS NEXT YEAR DIVIDEND AND IN FOLLOWING 2 YEARS.

Answer 2

SUFFECIENT INFORMATION NOT GIVEN TO SOLVE THIS REQUIREMENT.

Answer 3

(3.31 +5%) / (10%-5%) => 69.51

Dividend Growth New Dividend Discounting factor Share VAlue 2.30 - 2.30 0.909 2.09 2.30 20% 2.76 0.826 2.28 2.76 20% 3.31 0.751 2.49 3.31 5%

(3.31 +5%) / (10%-5%) => 69.51

0.751 52.20 Total $59.06

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