Concept explainers
ASR recently paid a dividend of $3 which is expected to grow continuously at a rate of 4% in perpetuity. The appropriate
Value of the stock when the dividends are growing at a constant rate is
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Check out a sample textbook solution- The Meddle Group paid a dividend of $7.00 last year. The company plans to keep the dividend of $7.00 constant forever. If investors require a return of 10.7 percent on the company's stock. What is the stock price?arrow_forwardYou are trying to decide whether to invest in a "value" stock (Hawaii Utility Co.) or a "growth" stock (HI Tech Co.). Hawaii Utility Co. currently pays a dividend of $5 per share per year, and you expect that dividend to grow by 1% per year forever (e.g., $5.05 next year). Its price is $125. HI Tech Co. currently pays a dividend of just $1 per share per year, but you expect its dividend to grow 4%6 per year forever. The price of HI Tech Co is also $125. Given your expectations, is one company a better deal than the other? Explain why or why not? (Hint; figure out the discount rate you would need to rationalize each price using the present value rules that we went over in class).arrow_forwardThe Baron Basketball Company (BBC) earned $10 a share last year and paid a dividendof $6 a share. Next year, you expect BBC to earn $11 and continue its payout ratio. Assumethat you expect to sell the stock for $132 a year from now. If you require 12 percenton this stock, how much would you be willing to pay for it?a) Given the expected earnings and dividend payments, if you expect a sellingprice of $110 and require an 8 percent return on this investment, how much would you pay for the BBC stock?b). Over the long run, you expect dividends for BBC to grow at 8 percent and you require 11 percent on the stock. Using the infinite period DDM, how much would you pay for this stock?arrow_forward
- Apple corporation is looking to invest in Dark Sky computing company. Dark Sky is specialized in weather forecasting software applications. Apple corporation is looking to invest in 500,000 shares of Dark Sky company in the end of the year. The current stock price of Dark Sky on the NASDAQ stock exchange is $24.84 per share, and the dividend yield for the coming year is expected to be 5.4%. a)What is the expected value of the first dividend payment at the end of the year? b) How would you use the dividend yield model to value the price of a stock if it presently does not pay dividends but is expected to pay dividends in the future?arrow_forwardYou have just purchased a share of stock for $21.34. The company is expected to pay a dividend of $0.54 per share in exactly one year. If you want to earn a 9.4% return on your investment, what price do you need if you expect to sell the share immediately after it pays the dividend? The price one year from now should be $ (Round to the nearest cent.)arrow_forwardSuppose that one year ago you bought 100 shares of SodaCo for $10 per share with the expectation of receiving a perpetual dividend of $1 per share. What was your expected annual percentage return on this investment? Today,SodaCo announces that it will increase its annual dividend to $2 per share.Upon announcement, the stock price rises to $20. If you then sell the stock,what percentage returnwould you realize on your investment?What annualreturnwould the buyer of your stock expect in the future? Why is there sucha difference in returns?arrow_forward
- You have just purchased a share of stock for $18.85. The company is expected to pay a dividend of $0.71 per share in exactly one year. If you want to earn a 9.1% return on your investment, what price do you need if you expect to sell the share immediately after it pays the dividend? The price one year from now should be $. (Round to the nearest cent.) Carrow_forwardHome Company paid an annual dividend of RM0.90 per share this year. The company expects that the dividend will grow an annual rate of 15 percent for the next five years and then drop to a gradual growth rate of 7 percent indefinitely. The required rate of return is 10 percent and the share is currently trading at RM48. i) Calculate the intrinsic value of the share today. ii) Justify whether you would buy the share. Please answer both questions, answer with your own words and opinion. not in point form but paragrapharrow_forwardWhite Wedding Corporation will pay a $3.35 per share dividend next year. The company pledges to increase its dividend by 4.34 percent per year, indefinitely. If you require a 10 percent return on your investment, how much will you pay for the company's stock today? Value of a stockarrow_forward
- Milford Masonry, Inc. expects to pay a dividend per share of $2.50 next year on its common stock. The firm has enjoyed a 4% annual growth rate over the past decade. If you can earn a 10% rate of return on other investments having similar risk, how much would you be willing to pay per share for Milford Masonry’s stock? Now, assume that you can only earn 6% on similar-risk investments. How much would you now be willing to pay for Milford Masonry’s stock?arrow_forwardTalkie is a company that has a patent right for a new mobile technology that is expected to enable it to generate growth of 20% for next three years. From the beginning of year 4, the company expects to grow at a constant rate of 5%. The company just paid a dividend of $2.20 on 31 Dec of Year 0.(a) Compute the estimate of the current price of Talkie shares. Assume the required return on equity is 10%.The realized return of Talkie share and Stock M for the past 5 years are detailed below:Year Talkie Stock M2020 15% 30%2019 5% 7%2018 -5% -3%2017 2% -8%2016 9% 20%(b) Compute the arithmetic mean and standard deviation of returns over the past 5 years for each stock?arrow_forwardApple corporation is looking to invest in Dark Sky computing company. Dark Sky is specialized in weather forecasting software applications. Apple corporation is looking to invest in 500,000 shares of Dark Sky company in the end of the year. The current stock price of Dark Sky on the NASDAQ stock exchange is $24.84 per share, and the dividend yield for the coming year is expected to be 5.4%. What is the expected value of the first dividend payment at the end of the year?arrow_forward
- EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENTIntermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning