Next year, a share of stock will pay an annual dividend of $2.50 (D1), and that...

 

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Next year, a share of stock will pay an annual dividend of $2.50 (D1), and that this dividend is expected to grow by $0.16 in each future year (i.e., $2.66 in Year 2, $2.82 in Year 3, $2.98 in Year 4, etc.). Also, the stock has a beta of 1.15, the risk-free rate is 3 percent, and the market risk premium is 5 percent (and CAPM is the correct model for required returns). As you can calculate, the price of this stock today should be $49.47. What percent of this value is based on the dividends to be received in Year 1 thru Year 25 (D₁ thru D25)? Next year, a share of stock will pay an annual dividend of $2.50 (D1), and that this dividend is expected to grow by $0.16 in each future year (i.e., $2.66 in Year 2, $2.82 in Year 3, $2.98 in Year 4, etc.). Also, the stock has a beta of 1.15, the risk-free rate is 3 percent, and the market risk premium is 5 percent (and CAPM is the correct model for required returns). As you can calculate, the price of this stock today should be $49.47. What percent of this value is based on the dividends to be received in Year 1 thru Year 25 (D₁ thru D25)?

Answer rating: 100% (QA)

To calculate the present value of the dividends received in Year 1 through Year 25 D to D and determ... View the full answer