Question

5. Keys Inc's stock has a required rate of return of 10%, and it sells for $50 per share.  Keys' dividend is expected to grow at a constant rate of 7% per year.  What was Keys' last dividend, D₀?

6.  Apple’s most recent dividend was $2.50 per share (D₀ = $2.50). The dividend is expected to grow at a rate of 10 percent per year.  The risk-free rate is 5 percent and the market rate of return is 10 percent (r_M). If the company’s beta is 1.3, what is the price of the stock today?

7. Your company paid a dividend of $3.00 last year (D₀ =3.0).  The growth rate is expected to be 9 percent for first year, 8 percent the second year, then 7 percent for the third year, and then the growth rate is expected to be a constant 6 percent thereafter.  The required rate of return on equity (r_s) is 10 percent.  What is the company’s current stock price (i.e., intrinsic value)?

      ||___9%______|__8%_______|__7%______|à__6%___________

      0                          1                      2                     3

*** Formula

P₀ = D₁ / (r – g),  D₁ = D₀ * (1+g),    r = (D₁ /P₀)  + g ,   Vps = Div / r,    

In equilibrium, expected return: (D₁ /P₀ )  + g   = required return: r_RF  + (r_M – r_RF) b

Answer 1

5

Price = recent dividend* (1 + growth rate )/(cost of equity - growth rate)

50 = Recent dividend * (1+0.07) / (0.1 - 0.07)

Recent dividend = 1.4

6

As per CAPM

expected return = risk-free rate + beta * (expected return on the market - risk-free rate)

Expected return% = 5 + 1.3 * (10 - 5)

Expected return% = 11.5

Price = recent dividend* (1 + growth rate )/(cost of equity - growth rate)

Price = 2.5 * (1+0.1) / (0.115 - 0.1)

Price = 183.33

Please ask remaining parts seperately, questions are unrelated, I have done one bonus