Question: A stock currently pays a dividend of 1 00 per share

A stock currently pays a dividend of $1.00 per share. Dividend growth rates in years 1-4 are expected to be 25%, 20%, 15%, and 10%, respectively. Starting in year 5 dividend growth is expected to settle down to a long-term average rate of 5%. The stock's CAPM required return = 9.0%.
a.) Calculate the intrinsic value of the stock.
b.) What is the stock's expected return if you buy it for $35 per share? Explain why the expected return at $35 per share differed from 9.0%.
c.) Calculate the stock's expected return if you buy it for $45 per share. Explain why the expected return at $45 per share differed from 9.0%.

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  • CreatedAugust 07, 2015
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