1) growth rates
The stock price of the company is $76
investors require a 14% rate of return on similar stocks
If the company plans to pay a dividend of $5.00 next year
the expected growth rate of the company's stock price is ______ percent
2) non constant dividends
A company has just paid a dividend of $13.00 per share.
They will increase the dividend by $6.00 per share for each of the next three years and then never pay another dividend. If you require a 15% return on the company's stock, you will pay $ _________ per share today
see my post above.
1) To calculate the expected growth rate of the company's stock price, we can use the Gordon Growth Model (also known as the Dividend Growth Model). The formula is:
Expected Growth Rate = (Dividend / Stock Price) + Rate of Return
Given:
- Stock price: $76
- Dividend next year: $5.00
- Required rate of return: 14%
We can substitute these values into the formula:
Expected Growth Rate = ($5.00 / $76) + 0.14
Expected Growth Rate = 0.0658 or 6.58%
Therefore, the expected growth rate of the company's stock price is approximately 6.58%.
2) To determine the price you should pay per share today for a stock with non-constant dividends, we need to calculate the present value of the future dividends. We can use the Present Value of a Growing Annuity formula. The formula is:
PV = (Dividend / (Rate of Return - Growth Rate)) * (1 - (1 + Growth Rate) ^ -n)
Given:
- Dividend for the first year: $13.00
- Dividend growth rate: $6.00
- Required rate of return: 15%
- Number of years with dividend growth: 3
We can substitute these values into the formula:
PV = ($13.00 / (0.15 - 0.06)) * (1 - (1 + 0.06) ^ -3)
PV ≈ $92.43 per share
Therefore, you would need to pay approximately $92.43 per share today for the stock.