Suppose Company X issues a common stock with current dividend as $1.62/per share. The expected growth rate for the dividends is said to be 2.5%. Let the current market price of the stock be $16.25/per share.
a) What is the discount rate for this stock if the market is fair and does not allow any arbitrage opportunity?
b) Suppose you own the stock now. Let's assume that you plan to hold the stock for 4 years only. What is your expected re-sell price for the stock?
c) There is another common stock issued by Company Y in the market. The current dividend for Company Y's stock is $3.20/per share. The current Company Y's stock price is $21.25/per share. Suppose this stock's discount rate is the same as that in question a) of problem 3. What is the growth rate of this stock's dividends?