Question

Please make sure that you show all your work when solving the problems. Feel free to make any assumptions whenever you feel necessary. Just make sure that you clearly state your assumptions.

Analysts expect MC, Co. to maintain a dividend payout ratio of 35% and enjoy an expected growth rate of 12% per year for the next 5 years. After the fifth year, all earnings will be paid out as dividends. The required rate of return on MC, Co equity is 8%.

a. Given that the last dividend paid was $0.5 and the current market price of the stock is $15, what growth rate does the market expect for MC, Co?

b. At what price would the analysts value the stock under their own expectations?

Answer 1

Constant growth dividend discount model

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