Question

Problem1: The XYZ Co. just paid a dividend of $1.95 per share on its stock. The dividends are expected to grow at a constant rate of 4% per year indefinitely. Assume investorsrequire a return of 10.5 % on the XYZ Co. stock. What will the price be in 3 years? Show yourwork/calculations

Problem2: The ABCorp. paid an annual dividend of $1.37 a share last month. Today, the company announced that future dividends will be increasing by 2.8 percent annually. If you require a return of 11.6 percent, how much are you willing to pay to purchase one share of this stock today?Show yourwork/calculations

Problem3: Temple Motors is expected to pay a $3.30 a share annual dividend next year. Dividends are expected to increase by 2.75 percent annually. What is one share of this stock worth to you today if yourrequired rate of return is 15 percent?Show yourwork/calculations

Answer 1

The price at time period 3 years would be the prsent value of all future dividends Time period 1 2.028 2.109 3 2.193 Dividend 2.281 Price at end of year 3 = Dividend at time 4/(required rate - growth rate) 2.281/(0.105-0.04) 35.09 the last dividend was 1.37 growth rate = 2.8% required rate = 11.6% Price = Expected dividend/(required rate-growth rate) 1.37*1.028/(0.116-0.028) 16.00 expected dividend = 3.30 growth rate = 2.75% required rate = 15% Price = Expected dividend/(required rate-growth rate) 3.3/(0.15-0.0275) 26.94