6.9 Chapter 6 HW - Spreadsheet Mastery // Stock // Problem 3 please answer questions 1 & 2. answers should be in the outlined boxes.

B C D G H | J K L E F Growing Dividends Problem 3: 90 91 r III LMN Company's dividends have historically grown at 2% per year. We expect this trend to continue. LMN Company paid a $4.00 dividend this year. If investments with similar risk eam 8%, how much is a share of LMN Company 92 worth today? 93 94 95 Given: 96 97 Definition Notation: Inputs: 98 The current, already paid (end of period 0) dividend Do $4.00 99 The required rate of return on the firm's common stock 0.08 100 The expected annual growth rate in dividends g 0.02 101 The expected upcoming (end of period 1) dividend Di ? 102 The present value of the stock share Po ? 103 104 Finance Concept: Po=D1/(r - g) 105 Di = D. (1+3) 106 107 Numerical Solution: 108 Di = D. (1+g) 109 D1 = 4 (1+.02) 110 D1 = 4.08 112 Po=D1/(r-) 113 Po= 4.08 / (.08-02) 114 Po = 4.08 /.06 115 Po=568. 116 117 In Words: The Present Value of a stock share with a current dividend of $4.00 and a constant growth rate 118 of 2% and a required return of 8%, is valued at $68 today. 119 120 Test your skills: 121 1 What would you pay today for a stock that is expected to make a $3.00 dividend in one year if the 122 expected dividend growth rate is 3% and you require a 15% retum on your investment? 123 124 Di Fill in the known inputs in cells E124:E126 125 g 126 127 128 Formula: Po=D1/(t - g) 129 130 Po= In cell E130 write the formula by clicking on the cells or 131 by typing in the values. Remember the () and / and 132 133 134 135 2 What would you pay today for a stock whose most recent dividend is S1, dividends are expected 136 to grow at 8% indefinitely and the required retum is 9.1%? 137 138 D1 = D. *(1+g) 139 140 Do 141 g 142 D1 We first find next year's dividend. Di. 143 r E 144 145 146 147 Fomula: Po=D1/(r-g) 148 D1 b) 1 149 150 151 152 Po= Then we find today's price