A company will pay a dividend of $3.28 per share next year. The dividends are expected to grow at 3.75 percent per year indefinitely. You require a return of 10 percent on your investment.How much will you pay for the company’s stock today?What is the stock’s dividend yield (Hint: dividend yield is a stock’s dividend divided by its price)?What will the price be in a year? What is the implied return given the change in price over the one-year period from today?Please use a HP 10bii+ Financial Calculator

Question
Asked Nov 24, 2019
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A company will pay a dividend of $3.28 per share next year. The dividends are expected to grow at 3.75 percent per year indefinitely. You require a return of 10 percent on your investment.

  1. How much will you pay for the company’s stock today?
  2. What is the stock’s dividend yield (Hint: dividend yield is a stock’s dividend divided by its price)?
  3. What will the price be in a year? What is the implied return given the change in price over the one-year period from today?

Please use a HP 10bii+ Financial Calculator

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Expert Answer

Step 1

Hi, due to unavailability of HP10bii+ Financial calculator, we will answer this question using excel.

Step 2

Part 1-3:

Calculation of Current Price, Dividend Yield, Price in 1 Year and Implied Return:

Excel Spreadsheet:

В
1
Part 1-3
$3.28
2 Current Dividends
3 Growth Rate
4 Required Return
3.75%
10%
$52.48
5
Current Price
6
Dividend Yield
6.25%
7 Price in One Year
8 Implied Return
$54.45
2.50%
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В 1 Part 1-3 $3.28 2 Current Dividends 3 Growth Rate 4 Required Return 3.75% 10% $52.48 5 Current Price 6 Dividend Yield 6.25% 7 Price in One Year 8 Implied Return $54.45 2.50%

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Step 3

Excel Workings:

...
A
В
1
Part 1-3
2 Current Dividends 3.28
0.0375
0.1
3 Growth Rate
4 Required Return
Current Price B2/ ( B4-B3)
6 Dividend Yield B2/B5
7 Price in One Year =(B2*(1+B3))/(B4-B3)
8Implied Return((B2*(1+B3))/B7)-B3
5
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A В 1 Part 1-3 2 Current Dividends 3.28 0.0375 0.1 3 Growth Rate 4 Required Return Current Price B2/ ( B4-B3) 6 Dividend Yield B2/B5 7 Price in One Year =(B2*(1+B3))/(B4-B3) 8Implied Return((B2*(1+B3))/B7)-B3 5

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