Silva Motors just paid a dividend of $2, i.e., D0 = $2.00. The dividend is expected to grow by 100% during Year 1, by 50% during Year 2, and then at a constant rate of 5% thereafter. If Silva's required rate of return is rs = 12%, what is the value of the stock today?
You are interested in a new Ford Taurus. After visiting your Ford dealer, doing your research on the best leases available, you have three options. (i) Purchase the car for cash and receive a $1,900 cash rebate from Dealer A. The price of the car is $19,000. (ii) Lease the car from Dealer B. Under this option, you pay the dealer $550 now and $225 a month for each of the next 36 months (the first $225 payment occurs 1 month from today). After 36 months you may buy the car for $10,900. (iii) Purchase the car from Dealer C who will lend you the entire purchase price of the car for a zero interest 36-month loan with monthly payments. The car price is $19,000. Suppose the market interest rate is 4%. What is the net cost today of the cheapest option? (Enter just the number in dollars without the $ sign or a comma and round off decimals.)
To find the value of the stock today, we can use the Dividend Discount Model (DDM).
The DDM formula is:
V0 = D0 * (1 + g1) / (rs - g1)
Where:
V0 = Value of the stock today
D0 = Dividend just paid
rs = Required rate of return
g1 = Growth rate for the first period
Given in the problem, we have:
D0 = $2.00
g1 = 100%
rs = 12%
Substituting these values into the formula, we have:
V0 = $2.00 * (1 + 100%) / (12% - 100%)
However, there is an issue with the calculation. A growth rate of 100% implies that the dividend will double in the first year. This might be a typo or an unrealistic assumption.
If we assume that the dividend growth rate during Year 1 is actually 100%, the formula becomes:
V0 = $2.00 * (1 + 100%) / (12% - 100%)
Simplifying further, we have:
V0 = $2.00 * 2 / (-0.88)
V0 = $4.55
Therefore, the value of the stock today is $4.55.