Refer to the following examples for part c) and d) A firm is expected to pay a $2 dividend per share next year and its dividend is expected to grow at a constant rate of 6% per year. If the required rate of return on the firm's stock is 10%, what is the firm's stock price (or intrinsic price) today? Because the dividend has a constant growth rate from the next year, the constant growth model can be used. According to the constant growth model, Stock price (intrinsic price) today = the next year's dividend per share (required rate of return dividend growth rate) = $2/(0.1 - 0.06) = $50. A firm has just paid a $1.5 dividend per share. If the required rate of return is 12% and the constant growth rate is 5%, what is the stock price (intrinsic price) today? %3D %3D %3D $1.5 dividend is today's dividend, not the next year's. So, we need the next year's dividend to use the constant growth model. Since the dividend grows at a 5% constant rate, the next year's dividend should be 1.5*(1+.05) = $1.58 (=> Actually this is the future value of today's dividend) %3D Then, the stock price today = 1.58/(.12 - .05) = $22.57 %3D c) Suppose that Troy Inc. has just paid a $3 dividend per share. If the required rate of return is 15% and the dividend is expected to grow at a constant rate of 4%, what is the stock price today? d) BMC is expected to pay a $1 dividend per share next year. If the stock price today is $20, what is the required rate of return? Assume that the dividend is expected to grow at a constant growth rate of 3%.
Refer to the following examples for part c) and d) A firm is expected to pay a $2 dividend per share next year and its dividend is expected to grow at a constant rate of 6% per year. If the required rate of return on the firm's stock is 10%, what is the firm's stock price (or intrinsic price) today? Because the dividend has a constant growth rate from the next year, the constant growth model can be used. According to the constant growth model, Stock price (intrinsic price) today = the next year's dividend per share (required rate of return dividend growth rate) = $2/(0.1 - 0.06) = $50. A firm has just paid a $1.5 dividend per share. If the required rate of return is 12% and the constant growth rate is 5%, what is the stock price (intrinsic price) today? %3D %3D %3D $1.5 dividend is today's dividend, not the next year's. So, we need the next year's dividend to use the constant growth model. Since the dividend grows at a 5% constant rate, the next year's dividend should be 1.5*(1+.05) = $1.58 (=> Actually this is the future value of today's dividend) %3D Then, the stock price today = 1.58/(.12 - .05) = $22.57 %3D c) Suppose that Troy Inc. has just paid a $3 dividend per share. If the required rate of return is 15% and the dividend is expected to grow at a constant rate of 4%, what is the stock price today? d) BMC is expected to pay a $1 dividend per share next year. If the stock price today is $20, what is the required rate of return? Assume that the dividend is expected to grow at a constant growth rate of 3%.
Chapter7: Common Stock: Characteristics, Valuation, And Issuance
Section: Chapter Questions
Problem 6P
Related questions
Question
Please show me step by step how to work parts c and d. Thank you.
Transcribed Image Text:Refer to the following examples for part c) and d)
A firm is expected to pay a $2 dividend per share next year and its dividend is expected to
grow at a constant rate of 6% per year. If the required rate of return on the firm's stock is 10%,
what is the firm's stock price (or intrinsic price) today?
Because the dividend has a constant growth rate from the next year, the constant growth
model can be used. According to the constant growth model,
Stock price (intrinsic price) today = the next year's dividend per share (required rate of return
dividend growth rate) = $2/(0.1 - 0.06) = $50.
A firm has just paid a $1.5 dividend per share. If the required rate of return is 12% and the
constant growth rate is 5%, what is the stock price (intrinsic price) today?
%3D
%3D
%3D
$1.5 dividend is today's dividend, not the next year's. So, we need the next year's dividend to
use the constant growth model. Since the dividend grows at a 5% constant rate, the next
year's dividend should be 1.5*(1+.05) = $1.58 (=> Actually this is the future value of today's
dividend)
%3D
Then, the stock price today = 1.58/(.12 - .05) = $22.57
%3D
c) Suppose that Troy Inc. has just paid a $3 dividend per share. If the required rate of return is
15% and the dividend is expected to grow at a constant rate of 4%, what is the stock price
today?
d) BMC is expected to pay a $1 dividend per share next year. If the stock price today is $20,
what is the required rate of return? Assume that the dividend is expected to grow at a constant
growth rate of 3%.
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 2 steps with 2 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
Intermediate Financial Management (MindTap Course…
Finance
ISBN:
9781337395083
Author:
Eugene F. Brigham, Phillip R. Daves
Publisher:
Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
Intermediate Financial Management (MindTap Course…
Finance
ISBN:
9781337395083
Author:
Eugene F. Brigham, Phillip R. Daves
Publisher:
Cengage Learning
Fundamentals Of Financial Management, Concise Edi…
Finance
ISBN:
9781337902571
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Fundamentals of Financial Management, Concise Edi…
Finance
ISBN:
9781285065137
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning