(6) A firm will pay a $3.04 per share dividend next year. The firm pledges to in

Question

(6) A firm will pay a $3.04 per share dividend next year. The firm pledges to increase its dividends by 3.8% per year indefinitely. If you require 11% return on your investments, how much will you pay for the firm’s stock today?

(7) A firm is expected to maintain a constant 5.2% growth rate in its dividends indefinitely. If the firm has a dividend yield of 6.3%, what is the required rate of return on the firm’s stock?

(8) A company pays a constant $9.75 dividend on its stock. The company will maintain the dividend for the next 11 years and will then stop paying dividends forever. If the required rate of return on this stock is 10%, what is the current share price?

(9) There is a young start-up company. No dividends will be paid on the stock over the next nine years because the firm needs to plow back its earnings to fuel growth. The firm will pay a $10 per share dividend in 10 years and will increase the dividend by 5% per year thereafter. If the required return on this stock is 14%, what is the current share price?

(10) A firm is growing quickly. Dividends are expected to grow at a 30% rate for the next three years, with the growth rate falling off to a constant 6% thereafter. If the required return is 13% and the company just paid a $1.80 dividend, what is the current share price?

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Explanation / Answer

All Amounts in $ 6. Revised dividends after increase will be 3.156 $ Since the required return on investments is 11% The price to be paid for the firm's stock today is 28.69 $ 7. The required rate of return on the firm's stock will be 1 / (6.3% X 105.2%) = 15.09 % 8. Based on the current dividend of $ 9.75 which will be paid for 11 years And a required rate of return on investments of 10% The present value of the dividend at this rate of return will be $ 63.33 At the rate of return given, the current share price works out to 633.3 $ 9. The value of the dividend after the increase of 5% will be $ 10 X 105% = 10.5 $ With a required rate of return of 14% The current share price of the stock works out to 75 $ 10. Dividends at the end of the fourth year will be Year Dividend 0 1.8 1 2.34 2 3.042 3 3.955 4 4.192 Since the required rate of return is 13% The current share price will be $ 4.192 / 13% = 32.25 $

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