6.9 Chapter 6 HW - Spreadsheet Mastery // Stock // Problem 2 please answer questions 1 and 2.

m J L r D F G H K 60 Problem 2: Constant Dividends We now think The ABC Company will pay a constant, non-growing dividend of $5.50 forever. An investment 61 with comparable risk is eaming 8%. What is the value today of one share of The ABC Company? 62 63 Under the assumptiuon of no growth, the stock's dividend stream is a simple perpetuity. 64 65 Given: 66 67 Definition Notation: Inputs: 68 The expected constant dividend Dt 5.5 69 The required rate of retum on the firm's common stock 0.08 70 The present value of the stock share (market price) 71 72 Finance Concept: Under the assumption of no growth, the stock's dividend stream is a simple perpetuity. 73 74 Numerical Solution: Po=D//r 75 Po = 5.5/0.08 76 Po = $68.75 77 78 In Words: The Present Value of a stock share with expected constant dividends of $5.50, and a required retum 79 of 8% is $68.75. 80 81 Test your skills: 82 1 What is the estimated stock price whose dividends are expected to be 50.75 forever with a 83 required return of 10%? Use the formula Po = Dr. 84 85 2 What is the estimated stock price whose dividends are expected to be 50.75 forever with a 86 required retum of 20%? Use the formula Po = D/t. 87 88