Perry, Inc., paid a dividend of $2.50 yesterday. You are interested in investing in this company, which

Question:

Perry, Inc., paid a dividend of $2.50 yesterday. You are interested in investing in this company, which has forecasted a constant-growth rate of 7 percent for its dividends, forever. The required rate of return is 18 percent.

a. Compute the expected dividends D₁, D₂, D₃, and D₄.

b. Compute the present value of these four dividends.

c. What is the expected value of the stock four years from now (P₄)?

d. What is the value of the stock today based on the answers to parts b. and c.?

e. Use the equation for constant growth (Equation 9.4) to compute the value of the stock today.

Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...