The Medical Equipment Company paid $2.25 common stock dividend last year. The company expects a dividend growth of 10% in year 1 and 2, no growth in dividends in year 3 as the company has a large capital expenditure project to take and hence need to retain profit in that year. Then a 15% growth is expected in year 4. The company’s policy is to allow its dividend to grow indefinitely at 5 percent per year starting year 5. What is the value of the stock if the shareholders required rate of return is 8 percent?
The Medical Equipment Company paid $2.25 common stock dividend last year. The company expects a dividend growth of 10% in year 1 and 2, no growth in dividends in year 3 as the company has a large capital expenditure project to take and hence need to retain profit in that year. Then a 15% growth is expected in year 4. The company’s policy is to allow its dividend to grow indefinitely at 5 percent per year starting year 5. What is the value of the stock if the shareholders required rate of return is 8 percent?
Chapter7: Common Stock: Characteristics, Valuation, And Issuance
Section: Chapter Questions
Problem 4P
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The Medical Equipment Company paid $2.25 common stock dividend last year. The company expects
a dividend growth of 10% in year 1 and 2, no growth in dividends in year 3 as the company has a large
capital expenditure project to take and hence need to retain profit in that year. Then a 15% growth is
expected in year 4. The company’s policy is to allow its dividend to grow indefinitely at 5 percent per
year starting year 5. What is the value of the stock if the shareholders required
percent?
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