Question

rework table 7.4 for horizon years 1, 2, 3, and 10, assuming that investors expect the dividend and the stock price to increase at only 6% a year and that each investor requires the same 12% expected return. the company will pay a dividend of $3 at the end of the first year. what value would an investor place on the stock?

Answer 1

The value of a stock with a $3 dividend, a dividend growth rate of 6% per year, and a required return of 12% is $50. This is calculated using the Dividend Discount Model.

Step-by-step explanation:

The student is asking how to value a stock assuming a certain dividend growth rate and required rate of return. To calculate the value of the stock for horizon years 1, 2, 3, and 10 with a dividend growth rate of 6% and a required return of 12%, we can use the Dividend Discount Model (DDM). The DDM states that the price of a stock is the present value of all its future dividends.

To find the value of the stock that will pay a $3 dividend at the end of the first year, we can use the formula:

P = D / (k - g)

Where P is the stock price, D is the dividend, k is the required rate of return, and g is the growth rate of the dividend. In this example, D is $3, k is 12% (or 0.12), and g is 6% (or 0.06). Therefore, the formula for the stock price becomes:

P = 3 / (0.12 - 0.06)

After calculating the above formula, we get:

P = 3 / 0.06

P = $50

An investor would place a value of $50 on this stock given the requirements.