Hello im a foreign exchange student and it hard for me to use excel. Can someone
ID: 2796812 • Letter: H
Question
Hello im a foreign exchange student and it hard for me to use excel. Can someone help me out? Thakn u very much apperciated
Problem 3 a. Gilmore Inc just paid a dividend of $2.35 per share on its stock. The dividends are expected to grow at a constant rate of 4.1% per year. If the investors require a return of 10.4 % on this stock, what is current price of the stock? What will be the price in 3 years? b. what if you want a 8% return? what does it tell you about the relationship between the rate of return and the stock price? c) An analysts is trying to estimate the rate of return on the stock investment. He finds the current price of the stock is $20. The firm is expected to pay $1.00 dividend next year and the growth rate in dividend is 10%, what will be the required rate of return on investment?Explanation / Answer
Price of Stock under Dividend Growth Model:-
P0 = D0 ( 1+g ) / ( Ke - g ) or D1 / ( Ke - g )
D0 is Just paid dividend
D1 is Dividend after 1 Year
g is growth in dividedn
Ke is cost of equity
A)
P0 = D0 ( 1+g ) / ( Ke - g )
= $ 2.35 ( 1 + 0.041 ) / ( 0.104 - 0.041 )
= $ 2.35 ( 1.041 ) / 0.063
= $ 2.4464 / 0.063
= $ 38.83
Price after 3 years :-
P3 = D4 / Ke - g
= D0 ( 1+g )4 / ( Ke - g )
= $ 2.35 ( 1 + 0.041 )4 / (0.104 - 0.041 )
= $ 2.7598 / 0.063
Price after 3 years = $ 43.81
B)
P0 = D1 / ( Ke - g )
= $ 3.14 / ( 0.12 - 0.045 )
= $ 3.14 / ( 0.075 )
= $ 41.87
if required return is 8%:
P0 = D1 / ( Ke - g )
= $ 3.14 / ( 0.08 - 0.045 )
= $ 3.14 / 0.035
= $ 89.71
There is inverse relation between Required rate & Stock price
C)
P0 = D1 / ( Ke - g )
$ 20 = $ 1.00 / ( Ke - 0.10 )
( Ke - 0.10 ) = $ 1.00 / $ 20
( Ke - 0.10 ) = 0.05
Ke = 0.05 + 0.10
= 0.15
Required return = 15%
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