Question

14 pts). Hadlock Healthcare expects to pay a $1.00 dividend at the end of the year (DI 51.00). The stock's dividend is expected to grow atamte of 10 percent a year until three years from now (t = 3). After this time, the stock's dividend is expected to grow at a constant rate of 5 percent wear. The stock's required rate of return Kis 11 percent A Estimate the stock price Po 3. Calculate expected dividend yield and expected capital gain yield, if purchase the stock with a price calculated in part A Estimate expected stock price in year I, that is imate expected stock price in year 5. that is Ps

Answer 1

Stock Price is equal to the present value of all future dividends

= 1/(1.11) + 1(1.10)/(1.11)^2 + 1(1.10)^2/(1.11)^3 + 1(1.10)^3(1.05)/(1.11)^3(11%-5%)

= $18.16 per share

B.Dividend yield = Expected Dividend/Current price

= 1/18.16

= 5.51%

Capital Gains yield = Return – Dividend Yield

= 11%-5.51%

= 5.49%

c.P1 = 19.16

P5 = D6/(Required return – growth rate)

= 23.35