Question

Use the following to answer questions 11-12: AVY paid $2.00 in dividends this past year (Div0). Analysts expect this payment will grow at 6% annually for the indefinite future. 11. What stock price is forecast with this constant-growth model if a discount rate of 10% is appropriate? A) $45 B) $53 C) $61 D) $70 hem ad b 90 A 12. What is the present value of the expected dividend in year 1? A) $2.12 B) $2.00 C) $1.93 D) $1.89

Answer 1

11)

price = dividend next year/(Required return - growth rate)

= 2 * (1+6%)/(0.1-0.06)

= 53

hence choose B)

12)

Present value = Future value/(1+i)^n

i = interest rate per period

n= number of periods

Present value of expected dividend

= 2* 1.06/1.1

= 1.93

hence choose C)