5. Gentry Can Company's (GCC's) latest annual dividend of $1.25 a share was paid yester- day and maintained its historic 7 percent annual rate of growth. You plan to purchase the stock today because you believe that the dividend growth rate will increase to 8 percent for the next three years and the selling price of the stock will be $40 per share at the end of that time. a. How much should you be willing to pay for the GCC stock if you require a 12 percent return? b. What is the maximum price you should be willing to pay for the GCC stock if you believe that the 8 percent growth rate can be maintained indefinitely and you require a 12 percent return? c. If the 8 percent rate of growth is achieved, what will the price be at the end of Year 3, assuming the conditions in part (b)?
5. Gentry Can Company's (GCC's) latest annual dividend of $1.25 a share was paid yester- day and maintained its historic 7 percent annual rate of growth. You plan to purchase the stock today because you believe that the dividend growth rate will increase to 8 percent for the next three years and the selling price of the stock will be $40 per share at the end of that time. a. How much should you be willing to pay for the GCC stock if you require a 12 percent return? b. What is the maximum price you should be willing to pay for the GCC stock if you believe that the 8 percent growth rate can be maintained indefinitely and you require a 12 percent return? c. If the 8 percent rate of growth is achieved, what will the price be at the end of Year 3, assuming the conditions in part (b)?
Chapter7: Common Stock: Characteristics, Valuation, And Issuance
Section: Chapter Questions
Problem 6P
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Transcribed Image Text:5.
Gentry Can Company's (GCC's) latest annual dividend of $1.25 a share was paid yester-
day and maintained its historic 7 percent annual rate of growth. You plan to purchase the
stock today because you believe that the dividend growth rate will increase to 8 percent
for the next three years and the selling price of the stock will be $40 per share at the end
of that time.
a. How much should you be willing to pay for the GCC stock if you require a 12 percent
return?
b. What is the maximum price you should be willing to pay for the GCC stock if you
believe that the 8 percent growth rate can be maintained indefinitely and you require
a 12 percent return?
c. If the 8 percent rate of growth is achieved, what will the price be at the end of Year 3,
assuming the conditions in part (b)?
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