Question

TDAC has just paid $3 per share. The required rate of return for the stock is 9%. It had difficult few years and so the Board of Directors decided to cut the dividend by 3% every year, starting next dividend to be paid. What is the price of the stock at the scenario? There are some optimist investors too. They think the decrease will be for the next 2 years only and after that the dividend will again grow at constant growth rate of 5% thereafter. The required rate of return for the stock is again 9%. What is the price of the stock for optimist investor?

Answer 1

Scenario 1:

Dividend paid = D₀= $3

Required Rate of Return = K= 9%

Scenario -1:- Dividend paid (De) = $ 3 Required rate of greturn (k) = 9.) Reduction in Dividend = 34. every year The Brice of Stock - Du Scenarid - 2 :- When the dividends more grown at a rate of 5% artes 2 years 1 Dz = D₂ (179) Dz = Q-82 (1+0.05) Dz = 2.96 K- 2.96 Shore Parce unde 912 Scenario -2 0.09 -0.05 $ 74 - where, D. - Do (1+9) = 3C1+ (-0.03) 3(1-0-03) = 3 (0.97) Di = 2.91 Police of the Stock = 9 0.09-60.03) = 2.91 = 24.25 0.12 1: TDAL Shaze Police at ? = $ 24.25 Scenario -1 2.91 :. "The Police Of TDAC Stock / . (= $74 Linder Scenaoito - T