12. The stock of Supergro Inc. is expected to grow at an annual rate of 28% for
ID: 2764992 • Letter: 1
Question
12.
The stock of Supergro Inc. is expected to grow at an annual rate of 28% for the next 2 years, after which growth will return to the normal constant growth rate of 8%. If the last dividend paid (that is, D0) was $2.00 and the required rate of return on stocks of this risk class is 16%, what is the price of the stock today?
Question 12 options:
$32.88
$44.25
$79.79
$43.11
$37.52
11.
The Johnson Company has just paid a dividend of $8.00 per share (i.e. D0 = $8.00) on its common stock, and it expects this dividend to grow by 13 percent per year, indefinitely. The required rate of return on the Jackson Company stock is 16%. How much should an investor be willing to pay for this stock today?
Question 11 options:
$ 56.50
$266.67
$301.33
$ 69.54
$148.25
$32.88
$44.25
$79.79
$43.11
$37.52
11.
The Johnson Company has just paid a dividend of $8.00 per share (i.e. D0 = $8.00) on its common stock, and it expects this dividend to grow by 13 percent per year, indefinitely. The required rate of return on the Jackson Company stock is 16%. How much should an investor be willing to pay for this stock today?
Question 11 options:
$ 56.50
$266.67
$301.33
$ 69.54
$148.25
Explanation / Answer
Question 12:
Price of the stock would be the present value of all future dividends and prices.
D1 = 2 x (1+0.28) = 2.56
D2 = 2.56 x (1+0.28) = 3.2768
P2 = D2 x (1+g) / (R-g)
= 3.2768 x (1+0.08)/ (0.16-0.08)
= 44.24
Now, we need to compute PV of dividends and prices:
Year
Cash flow
PV factor 16%
PV
1
2.56
0.8621
2.2069
2
3.2768
0.7432
2.4352
2
44.24
0.7432
32.8775
$37.52
So, the current price of the stock would be 37.52.
Year
Cash flow
PV factor 16%
PV
1
2.56
0.8621
2.2069
2
3.2768
0.7432
2.4352
2
44.24
0.7432
32.8775
$37.52
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