Question

A company currently pays a dividend of $3.8 per share ( D₀ =$3.8 ). It is estimated that the company's dividend will grow at a rate of 22% per year for the next 2 years, and then at a constant rate of 6% thereafter. The company's stock has a beta of 1.7 , the risk-free rate is 9%, and the market risk premium is 6%. What is your estimate of the stock's current price? Do not round ntermediate calculations. Round your answer to the nearest cent. Return on Common Stock You buy a share of The Ludwig Corporation stock for $20.90. You expect it to pay dividends of $1.08,$1.1610, and $1.2481 in Years 1, 2, and 3, respectively, and you expect to sell it at a price of $25.96 at the end of 3 years.

a. Calculate the growth rate in dividends. Round your answer to two decimal places. %
b. Calculate the expected dividend yield. Round your answer to two decimal places. %
c. Assuming that the calculated growth rate is expected to continue, you can add the dividend yield to the expected growth rate obtain the expected total rate of return. What is this stock's expected total rate of return (assume market is in equilibrium with the required rate of return equal to the expected return)? Do not round intermediate calculations. Round your answer to two decimal places.

Answer 1

An investor would pay for a share of Babble, Inc. based on the present value of future profits, divided by the total number of shares. Assuming a 15% discount rate, the stock price would be approximately $256,500 per share given the company's expected profits paid out as dividends.

Step-by-step explanation:

Consider the case of Babble, Inc., a company that offers speaking lessons. The company expects profits to be $15 million immediately, $20 million one year from now, and $25 million two years from now, which will be disbursed as dividends. To find out what an investor would pay for a share of this company's stock, one would calculate the present value (PV) of the future dividends using an appropriate discount rate (in this case, let's say it's 15%). The future profits are then discounted to their present values (PVs) and added together. Given the total number of shares is 200, the price per share would be the total PV of the profits divided by the number of shares. Assuming a total PV of profits of 51.3 million, the price per share would be $256,500 per share. It is important to note that expected profits in the real world would be an estimate, not precise figures, and selecting the appropriate discount rate can be subject to various factors.