Gentry Can Company’s (GCC) latest annual dividend of $1.25 a share was paid yesterday as the company maintained its historic 7% annual rate of dividend growth. The current market price is based on the belief that the 7% growth rate will be maintained forever. However, you believe that the dividend growth rate will increase by 8% for the next three years and that in three year’s time the stock price will be $40. You and other investors require a 12% rate of return. (18 marks) a) What do you believe is the current intrinsic value of GCC stock? (6 marks) b) Assuming that you were right about the dividends growing at 8% forever and that the market incorporates that at t=3 in the share price. What will the price be at t=3? (6 marks) c) The company Econ305 Inc, just announced yesterday that its 4th-quarter earnings were 50% higher than last year\'s 4th quarter. But the Econ305 share price dropped by 2.2% yesterday! Give at least two reasons why this may have happened, even though the market was, and still is, informationally efficient. (6 marks)

Answer rating: 100% (QA)

a The current dividend is 125 and if the 7 growth forever is assumed then the stock price can be cal... View the full answer