4) Suppose stock AAA pays an annual dividend of $2. Shareholders require a rate of return of12% annually on the stock.a) Use the DDM model to find the price of the stock.b) Suppose the firm just paid a dividend of $2 but it is expected that the dividend rate willgrow at a fixed rate such that next year's dividend will be $2.20. What will the dividendpayments be over the next 3 years?c) With the growth rate as described in part b), calculate the price of a single share of thestock.d) Now suppose you hear from an well known analyst that even though the firm just paid a $2dividend, the firm is expected to have supernormal growth rate of 20% over the next 5years. After that, growth will level off to 10% per year. Over these 5 years, the firm plans totake on massive amounts of debt. So the discount rate investors should use is 15% overthose supernormal growth years. After that the discount rate should revert to 12%.Calculate the price of a share of stock.

Name: 4) Suppose stock AAA pays an annual dividend of $2. Shareholders requ
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Description: 4) Suppose stock AAA pays an annual dividend of $2. Shareholders require a rate of return of12% annually on the stock.a) Use the DDM model to find the price of the stock.b) Suppose the firm just paid a dividend of $2 but it is expected that the divi

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4) Suppose stock AAA pays an annual dividend of $2. Shareholders require a rate of return of 12% annually on the stock. a) Use the DDM model to find the price of the stock. b) Suppose the firm just paid a dividend of $2 but it is expected that the dividend rate will grow at a fixed rate such that next year's dividend will be $2.20. What will the dividend payments be over the next 3 years? c) With the growth rate as described in part b), calculate the price of a single share of the stock.

4) Suppose stock AAA pays an annual dividend of $2. Shareholders require a rate of return of 12% annually on the stock. a) Use the DDM model to find the price of the stock. b) Suppose the firm just paid a dividend of $2 but it is expected that the dividend rate will grow at a fixed rate such that next year's dividend will be $2.20. What will the dividend payments be over the next 3 years? c) With the growth rate as described in part b), calculate the price of a single share of the stock.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 11P

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