Business, 03.07.2020 17:01 ayoismeisjjjjuan

A company will pay a $2 per share dividend in 1 year. The dividend in 2 years will be $4 per share, and it is expected that dividends will grow at 5% per year thereafter. The expected rate of return on the stock is 12%. Required:
a. What is the current price of the stock?
b. What is the expected price of the stock in a year?
c. Show that the expected return, 12%, equals dividend yield plus capital appreciation.

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Answer from: 10027945

current price P = $ 52.81

The expected price of the stock after one year = $57.16

The Total expected return for any investor after one year = 12%

Explanation:

Given that:

Dividend paid in 1 year = $2/ share

Dividend paid in 2 years = $4/share

Expect growth rate of the dividends g = 5% = 0.05

Expected rate of return on the stock r =12% = 0.12

Required:

a. What is the current price of the stock?

To calculate the current price of the stock ; we need to first determine the terminal value of the stock which can be done by using the formula:

$Terminal \ Value = \dfrac{Dividend \ for \ the \ second \ year*(1+g)}{r-g}$

$Terminal \ Value = \dfrac{4*(1+0.05)}{0.12-0.05}$

$Terminal \ Value = \dfrac{4*(1.05)}{0.07}$

$Terminal \ Value = \dfrac{4.2}{0.07}$

Terminal value = $60

Now; the current price of the stock is calculate as follows:

$current \ price \ P = \dfrac{\$ 2}{(1+0.12)^1} + \dfrac{\$ 4 }{(1+0.12)^2} + \dfrac{\$ 60}{(1+0.12)^2}$

$current \ price \ P = \dfrac{\$ 2}{1.12} + \dfrac{\$ 4 }{1.2544} + \dfrac{\$ 60}{1.2544}$

current price P = $1.79 + $3.19 + $47.83

current price P = $ 52.81

b) What is the expected price of the stock in a year?

The expected price of the stock after one year = $\dfrac{\$ 4}{(1+0.12)^1}+ \dfrac{\$60}{(1+0.12)^1}$

The expected price of the stock after one year = $3.58 + $53.58

The expected price of the stock after one year = $57.16

c. Show that the expected return, 12%, equals dividend yield plus capital appreciation.

We understand now that the current price of the sock = $52.81

and the expected price of the stock after one year = $57.16 ; so any investor who purchased the stock at the current price will receive a dividend of $2 after one year.

Hence;

The Total expected return for any investor after one year =( (price after one year - current price ) + Dividend received) /current price

The Total expected return for any investor after one year =( ($57.16 - $52.81)+ $2 )/$52.81

The Total expected return for any investor after one year = ($4.35+$2)/$52.81

The Total expected return for any investor after one year = 0.12

The Total expected return for any investor after one year = 12%

Answer from: Quest

answer$225.00;

Answer from: Quest

Well, i would start out by advertising a lot. take money out of unused profit to have build boards put up and internet advertising. also, make sure your store signs are large and noticeable. make sure you have good deals and prices that the average consumer would be okay with. also, location is key. being in a high technology based city/location would be excellent for your business because it is based off of technology. hope this ! : )

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A company will pay a $2 per share dividend in 1 year. The dividend in 2 years will be $4 per share,...