Final answer:
The expected dividend of VI in 3 years is $2.315, the current stock price is $30, the expected value 1 year from now is $31.50, and with zero growth the stock price would be $16.67. The expected dividend yield is 6.67 percent, capital gains yield is 5 percent, and total return is 11.67 percent.
Step-by-step explanation:
To answer the student's questions about Victoria Inc. (VI) stock:
A. The firm's expected dividend in 3 years
Using the constant growth dividend model, the expected dividend in 3 years (D3) will be calculated as D0*(1+g) ^3, where D0 is the last dividend and g is the growth rate. D3 = $2.0 * (1+0.05) ^3 = $2.315.
B. The firm's current stock price
The current stock price (P0) can be calculated using the formula P0 = D1 / (k-g), where D1 is the next year's expected dividend, k is the required rate of return, and g is the growth rate. P0 = $2.0 * (1+0.05) / (0.12 - 0.05) = $30.
C. The stock's expected value 1 year from now
The stock's expected value 1 year from now (P1) can be calculated by using P0 and growing it by the growth rate. P1 = P0 * (1+g) = $30 * (1+0.05) = $31.50.
D. The expected dividend yield, capital gains yield, and the total return during the first year
The expected dividend yield is the dividend in the next year (D1) divided by the current stock price (P0), which is 6.67 percent. Capital gains yield is the growth rate, which is 5 percent. The total return is the sum of the dividend yield and the capital gains yield, which is 11.67 percent.
E. The stock price with zero growth
If the stock's dividends were expected to have zero growth, the stock price would be calculated using the formula P0 = D / k. So, P0 = $2 / 0.12 = $16.67.