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 thestock today because you believe that the dividend growth rate will increase to 8 percentfor the next three years and the selling price of the stock will be $40 per share at the endof that time.a. How much should you be willing to pay for the GCC stock if you require a 12 percentreturn?b. What is the maximum price you should be willing to pay for the GCC stock if youbelieve that the 8 percent growth rate can be maintained indefinitely and you requirea 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)?

Question
Asked Feb 9, 2020
18 views
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)?
help_outline

Image Transcriptionclose

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)?

fullscreen
check_circle

Expert Answer

Step 1

a) Latest annual dividend is $1.25, price at the end of 3rd year is $40. Growth rate of dividends for next three years is 8%. Therefore, current price should be the present value of next three years dividend and $40.

Current price of the stock can be calculated as below:

Finance homework question answer, step 1, image 1

Answer: Price, he should be willing to pay is $31.96

Step 2

b) If the growth rate is expected to be 8% indefinitely and required return is 12%, then price can be calculated as below:

Finance homework question answer, step 2, image 1

Answer: Maximum price of the stock would be $33.75

...

Want to see the full answer?

See Solution

Check out a sample Q&A here.

Want to see this answer and more?

Solutions are written by subject experts who are available 24/7. Questions are typically answered within 1 hour.*

See Solution
*Response times may vary by subject and question.
Tagged in

Business

Finance

Related Finance Q&A

Find answers to questions asked by student like you
Show more Q&A
add
question_answer

Q: a. Several years ago, Castles in the Sand Inc. issued bonds at face value of $1,000 at a yield to ma...

A: Calculation of Current Bond Price and Yield to Maturity: Excel Spreadsheet:

question_answer

Q: Could I Industries just paid a dividend of $1.10 per share. The dividends are expected to grow at a ...

A: Given that;Recent dividend is $1.10Expected growth rate of dividends for next 6 years is 20%Constant...

question_answer

Q: An auto plant that costs $140 million to build can produce a line of flexfuel cars that will produce...

A: a-1 Computation of NPV: Excel spread sheet:

question_answer

Q: Should stockholder wealth maximization be thought of as a long-term or a short-term goal? For exampl...

A: Stockholder wealth maximization can be considered as long-run objective of a firm. Organizations, an...

question_answer

Q: Don’s Captain Morgan, Inc. needs to raise $12.70 million to finance plant expansion. In discussions ...

A: The offer price for the share is $20.60.The receivable price per share is $16.75.The underwriter spr...

question_answer

Q: Which one of the following is the correct formula for computing the present value of $600 to be rece...

A: Solution: Present value is other ways known as current\ present discounted value.

question_answer

Q: Compute the Payback statistic for Project X and recommend whether the firm should accept or reject t...

A: Payback period refers to the time period for an investment or a project to recover its initial outfl...

question_answer

Q: Currently James Corporation is using a decentralized collection system whereby customers mail their ...

A: Calculation of Total Benefits:The total benefits is $68,630.14.Excel Spreadsheet:

question_answer

Q: Problem 3(3): The soccer player Messi is estimated to have earned $127mil. in 2019. He currently is ...

A: The question is based on time value of money in which present value of future cash flows are require...