Question 1) A stock you are evaluating just paid an annual dividend of $2.50. Dividends have grown at a constant rate of 1.5% over the last 15 years and you expect this to continue.
a. If the required rate of return on the stock is 12% what is its fair present market value?
b. If the requested rate of return on the stock is 15% what is its expected price four years from today?
Question 2) You are considering the purchase of a stock that is currently selling at $64 per share. You expect the stock to pay $4.50 in dividends next year.
a) If the dividend are expected to grow at a constant rate of 3% per year what is your expected rate of return on this stock?
b) If the dividend are expected to grow at a constant rate of 5% per year what is your expected rate of return on this stock?
c) What do your answers in parts a and b tell you about the impact of dividend growth rates on expected rate of returns?
Question 3) A stock that you are evaluating is expected to experience supernormal growth In dividends of 8% over the next six years. Following this period, dividends are expected to grow at a constant rate of 3. The stock paid a dividend of $5.50 last year and the required rate of return on the stock is 10%. Calculate the stocks fair present market value.