Question

Asked Jul 9, 2019

144 views

The Company dividend appears to grow smoothly at a constant rate of 5.5%. Analysts forecast that next year’s dividend should equal $3.8. Investors require 14% return on this class of stock. What would be the price in 7 years? Use annual compounding.

Step 1

Recall the Gordan Growth Model with constant growth. Price at any time t is given by

P_{t} = D_{t+1} / (k_{e }– g)

Where D_{t + 1} = expected dividend in the year t + 1

k_{e} = Cost of equity = rate of return required by the investors

g = growth rate in dividends (or earnings)

Step 2

Based on the expression in step 1, it should not take us long to realize that:

The price in 7 years = P_{7} = D_{8} / (k_{e} – g)

k_{e} = 14%; g = 5.5%; Expected dividend next year = D_{1} = $ 3.8

Hence, D_{8} = D_{1} x (1 + g)^{7} = $ 3.80 x (1 + 5.5%)^{7} = $ 5.53

Step 3

Hence, P7 = D8 / (ke – g) = $ 5.53 / (14%...

Tagged in

Q: I got an answer of 6.2% for this question, Can you confirm or deny my answer? R.S. Green has 250,000...

A: The final answer is 6.16% that can be rounded off to 6.2%. Hence, your answer is correct.Let's assig...

Q: Assume Technical Investors is thinking about three different size offerings for issuance of addition...

A: The percentage underwriting spread for each size offer is calculated as follows:Percentage underwrit...

Q: Value/other investment criteria (i Saved Help Save Consider the following two projects: Cash flows P...

A: Hi. As per the guidelines we are allowed to answer the first four parts of a sub-part question. Kind...

Q: Kose, Inc., has a target debt-equity ratio of 1.31. Its WACC is 8.1 percent, and the tax rate is 22 ...

A: Kose, Inc., has a target debt-equity ratio of 1.31. Its WACC is 8.1 percent, and the tax rate is 22 ...

Q: Here are some historical data on the risk characteristics of Ford and Harley Davidson. Harley Davids...

A: Since you have asked a question with five sub parts, I will address the first three sub parts. Pleas...

Q: 3. Bonds: The three parts of this problem are related. By studying prices of zero coupon STRIPS, you...

A: If rn andrSn+1 are the spot rates for the year n and n+1 respectively, then one year forward rate be...

Q: Until August 1971, industrialized countries around the world maintained a fixed exchange rate of the...

A: Answer 1:The correct answer is “Forward exchange rate”.Justification: A forward exchange rate is wh...

Q: Let C be the price of a call option that enables its holder to buy one share of a stock at an exerci...

A: Given that, K is the exercise price, S is stock price at time 0.

Q: Rappaport Industries has 6,250 perpetual bonds outstanding with a face value of $2,000 each. The bon...

A: Calculating the value of interest tax shield. We have,Interest payment per year = Face Value of bond...