Consider shares of common stock in Widgets, Inc. Suppose that the last dividend paid out to

shareholders was $3.00 (Do = $3), the risk-free interest rate is 2%, and that the expected risk

premium for shares of comparably risky stock is 10% per year.

1. If dividends are expected to grow at a rate of 7% per year for the foreseeable future, what is the equilibrium price of the stock today (Po*)?
2. If dividends are expected to remain at $3.00 per share forever, what is the equilibrium price of the stock today (Po*)?
3. Now suppose that the stock's issuer has never paid a dividend (Do = 0), but the stock is expected to pay its first dividend in 5 years. If the first dividend payment is expected to be $3.00 (i.e. - D1=D2=D3=D4=0; D5 = 3), and dividends are expected to grow at a rate of 7% per year after that, what is the equilibrium price of the stock today (Po*)?

Answer rating: 100% (QA)

Widgets Inc Stock Valuation We can use the Dividend Discount Model DDM to find the equilibrium price ... View the full answer