You buy a share of stock today. The stock is paying dividends, and the first dividends to be paid at the end of the first year (t=1) is D₁ = $2. Dividends are expected to grow at the annual rate of 5% through year 15 (t=15). Thereafter, starting in year 16, the growth rate will fall to 1% per year and will ensure indefinitely. The required rate of return is 12%.

Find Terminal Cash Flow, i.e. the present value at t=15 of the growing perpetuity that starts with D_16.

A firm is currently priced per Gordon's model. Beta is 1.25, the expected rate of return on the market portfolio is 12%, and the risk-free rate of return is 4%. ROE = 15%. Jensen's alpha is zero. The firm has a retention ratio of 60%. The next year's dividend per share D₁ is expected to be $1.50.

Find the stock price per share?

Answer rating: 100% (QA)

SOLUTION For the first question To find the terminal cash flow we need to calculate the pres... View the full answer