Stock A pays a dividend of $3 per share next year. The constant growth rate of t
ID: 2800841 • Letter: S
Question
Stock A pays a dividend of $3 per share next year. The constant growth rate of the dividend is 5% every year. The discount rate is 10%.
1.If you hold the stock for one year, what is the price for stock A you have to pay now (P0) ?
A) $60
B) $63
C) $30
D) $ 55
E) None of the above
2.If you hold the stock for two years, what is the price for stock A you have to pay now (P0)?
A) $61
B) $62
C) $63
D) $55
E) None of the above
3.If you hold the stock for three years, what would be the price for stock A three years from now (P3)?
A) $60
B) $63
C) $69
D) $ 55
E) None of the above
4.If you hold the stock for two years, what would be the price for stock A two years from now (P2)?
A) $60
B) $63
C) $66
D) $55
E) None of the above
Explanation / Answer
Answer 1.
Next Year Dividend, D1 = $3.00
Growth rate, g = 5%
Discount Rate, r = 10%
D2 = D1 * (1+g)
D2 = $3.00 * 1.05
D2 = $3.15
P1 = D2 / (r - g)
P1 = $3.15 / (0.10 - 0.05)
P1 = $63.00
P0 = $3.00/1.10 + $63.00/1.10
P0 = $60.00
Answer 2.
D1 = $3.00
D2 = $3.15
D3 = $3.15 * 1.05
D3 = $3.3075
P2 = D3 / (r - g)
P2 = $3.3075 / (0.10 - 0.05)
P2 = $66.15
P0 = $3.00/1.10 + $3.15/1.10^2 + $66.15^1.10^2
P0 = $60.00
Answer 3.
D1 = $3.00
D2 = $3.15
D3 = $3.3075
D4 = $3.3075 * 1.05
D4 = $3.4729
P3 = D4 / (r - g)
P3 = $3.4728 / (0.10 - 0.05)
P3 = $69
Answer 4.
D1 = $3.00
D2 = $3.15
D3 = $3.15 * 1.05
D3 = $3.3075
P2 = D3 / (r - g)
P2 = $3.3075 / (0.10 - 0.05)
P2 = $66
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.