l. What is the price of the stock today? b. Holding all else constant, suppose d
ID: 377031 • Letter: L
Question
l. What is the price of the stock today? b. Holding all else constant, suppose dividends will be held constant into th UOI management announces a dividend freeze; e foreseeable future. What will be the new price of UOI stock? nd Cs 0 LI+.os) 33.88- dividknd Redo to oot logts. 11) Tough times have hit the retail store chain of Brador, Inc. Analysts expect its dividend of to fall by 50 percent next year and another 50 percent the following year ,si turns to its normal growth pattern of3 percent a year. If investors expect a return n their investments in Brador stock, what should its current stock price be rce (6 points)?
Explanation / Answer
Dividend after 2 years = 1*(1-50%)2 = 0.25
NPV of 0.25 = 0.25/(1+0.12)^2 = 0.20
Share price = d*(1+g)/(r-g) , where d is dividend, g is growth rate and r is expected return
= 0.20*(1+0.03)/(0.12-0.03)
= $ 2.29
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