Question 3 Company 1 just paid a dividend of $2.50 per share. The dividends are expected...

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Question 3 Company 1 just paid a dividend of $2.50 per share. The dividends are expected to grow at 5%, 6% and 10% in year 1, 2 and 3, respectively. After year 2 (from year 3 onwards), dividends are estimated to grow at 4% thereafter indefinitely. The required rate of return for Company 1 is 15% p.a. Company 2 announces to pay $3.00 per share in the coming year. The dividends are expected to grow at 7%, 9%, 12% and 15% in year 1, 2, 3 and 4, respectively. After year 4 (from year onwards), dividends are estimated to grow at 5% thereafter indefinitely. The required rate of return for Company 2 is 15% p.a. Required: (a) Compute the current stock price for Company 1 and 2. 5 (4 marks) (b) Compute the stock price at year 2 for Company 1 and 2. (6 marks) (c) If the interest rate is expected to be lower, which stock has a better performance, i.e., a larger change in stock price? (5 marks) Question 3 Company 1 just paid a dividend of $2.50 per share. The dividends are expected to grow at 5%, 6% and 10% in year 1, 2 and 3, respectively. After year 2 (from year 3 onwards), dividends are estimated to grow at 4% thereafter indefinitely. The required rate of return for Company 1 is 15% p.a. Company 2 announces to pay $3.00 per share in the coming year. The dividends are expected to grow at 7%, 9%, 12% and 15% in year 1, 2, 3 and 4, respectively. After year 4 (from year onwards), dividends are estimated to grow at 5% thereafter indefinitely. The required rate of return for Company 2 is 15% p.a. Required: (a) Compute the current stock price for Company 1 and 2. 5 (4 marks) (b) Compute the stock price at year 2 for Company 1 and 2. (6 marks) (c) If the interest rate is expected to be lower, which stock has a better performance, i.e., a larger change in stock price? (5 marks)