Chapter 7 Stock Valuation ventures will pay an annual dividend of AED 3.15 a sha

Question

Chapter 7 Stock Valuation ventures will pay an annual dividend of AED 3.15 a share on their common stock next week. Last year, the company paid a dividend of AED 3.00 a share. The company adheres to a constant rate of growth dividend policy. What will one share of this common stock be worth ten years from now if the applicable discount rate is 12.5 percent? 2. Last week, Ramada paid an annual dividend of AED 244 per share. The company has been reducing the div purchase stock in this company if your required rate of return is 16 percent? by 15 percent each year. How much are you willing to pay to 3. The Home Market has adopied a policy of increasing the annual dividend on their common stock at a constant rate of 3.75 percent annually. The firm is paying an annual dividend of $1.10 today. What will the dividend be five years from now? The common stock of TAM an annual dividend that is expécted to increase by 3.6 percent per year. The stock commands a market rate of return of 11.6 percent and sells for $37.80 a share. What is the expected amount of the next dividend? 4. 5. The current yield on RMT common stock is 3.6 percent. The company just paid a $1.80 dividend and plans to pay$1.86 next year. The dividend growth rate is expected to remain constant at the current level. What is the required rate of return on this stock?

Explanation / Answer

Solution :

1. Growth Rate, g = (3.15-3)/3 * 100 = 5%

Dividend to be paid now, D0 = 3.15

Dividend to be paid 11 years from now, D11 = D0(1+g)11 = 3.15(1+0.05)11 = 3.15 * 1.71 = 5.3865

Discount Rate, r = 12.5%

Price of Stock ten years form now, P10 = D11/(r -g)

= 5.3865/(0.125-0.05)

= 5.3865/0.075

= 71.82

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