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Bond and Stocks

M&M Inc has just paid an annual dividend of $2.40 per share and current market expectations are for dividends to grow at 6%. The required return on the firm’s stock is 14%.

(a) What is the firm’s share price today?

(b) What is the firm’s share price one year from today?

(c) Find the future value of your answer to part (a) by compounding it at the required return for a year. Why is this result different from your answer to part (b)?

(d) Suppose management announces tomorrow that next year’s dividend is going to be $2.50 per share. Assuming constant dividend growth continues to apply, describe how share price will change, if at all. Does your answer suggest that dividend policy matters? Explain by making reference to your stock valuation model.

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