After one year, a company will pay $5 in dividends. It commits to paying $5.30 two years from the current date. This growth rate for dividends is expected to continue indefinitely. The U.S. Treasury bond yield is 8% and the equity-risk premium is equal to 2.5%. Compute the required stock return and current price of this stock, using the dividend-discount model.
What will be an ideal response?
The required stock return is 10.5%. To find the price of the stock, we need to compute the growth rate of dividends: 6% = ($5.3 - $5)/$5. Now, we can compute the current price of the stock:
Ptoday = Dtoday(1 + g)/(rf + rp - g)
Ptoday = $5(1 + 0.06)/(0.105 - 0.06)
Ptoday = $117.78
You might also like to view...
Legislating input combinations in a particular industry can bias the decision making of the firm's managers and lead to higher-than-necessary costs of production.
Answer the following statement(s) true (T) or false (F)
According to the infant industry argument for trade protectionism
A) new industries are capable of competing with established rivals. B) trade barriers must be used to protect domestic workers. C) new industries need to be shielded from competition in the early stages of learning by doing. D) tariffs imposed to aid new industries should never be removed.
Suppose a risk-neutral power plant needs 10,000 tons of coal for its operations next month. It is uncertain about the future price of coal. Today it sells for $60 a ton but next month it could be $50 or $70 (with equal probability). How much would the power plant be willing to pay today for an option to buy a ton of coal next month at today's price? (Ignore discounting over the short period of a
month.) a. 5 b. 4 c. 3 d. 0
Which of the following is not a resource?
a. Land. b. Labor. c. Money. d. Capital.