3BH3 Part 1 Stock Valuation [LO1] Estes Park Corp. pays a constant $7.80 dividen

Question

3BH3

Part 1

Stock Valuation [LO1] Estes Park Corp. pays a constant $7.80 dividend on its stock. The company will maintain this dividend for the next 13 years and will then cease paying dividends forever. If the required return on this stock is 11.2 percent, what is the current share price?

Part 2

Stock Valuation and Required Return [LO1] Red, Inc., Yellow Corp., and Blue Company each will pay a dividend of $3.25 next year. The growth rate in dividends for all three companies is 4 percent. The required return for each company’s stock is 8 percent, 11 percent, and 14 percent, respectively. What is the stock price for each company? What do you conclude about the relationship between the required return and the stock price?

Please specify between part 1 & 2 thanks!

Explanation / Answer

Part 1 Dividend(D)=7.8 Rate of Return (r)=11.2% Hence Stock Price=(Dividend/r)*(1-1/(1+r)^n)=(7.8/0.112)*(1-1/(1+0.112)^13)= 52.12365 Part 2 Red Inc Yellow Blue Dividend 3.25 3.25 3.25 Growth rate 4% 4% 4% Reqd Return 8% 11% 14% Stock Price 81.3 46.4 32.5 Stock Price=D/(r-g) D=Dividend Next Year r=Reqd rate of Return g=Growth Rate Example for Red inc Stock price=3.5/(8%-4%)=81.3 The reqd rate of return and stock price have inverse relationship, the same can be seen in the stock prices of Red Inc, Yellow corp and blue company as the required rate of return rises the stock price is declining

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