A stock just paid an annual dividend of $2.9. The dividend is expected to grow by 8% per year for the next 4 years. The growth rate of dividends will then fall steadily by 1.5% per year, from 8% in year 4 to 2% in year 8 and stay at that level forever. The required rate of return is 12%.1. What is the stock price if the dividend growth rate will stay 0.05 (5%) forever after 6 years?2. In 6 years, the P/E ratio is expected to be 25 and the payout ratio to be 80%. What is the stock price when using the P/E ratio?

1)

Div₀ = $2.90

Div₁ = $3.132

Div₂ = $3.38256

Div₃ = $3.65316

Div₄ = $3.94542

Div₅ = $4.20187

Div₆ = $4.41196 (an then g = 5% forever)

rrr = 12%

terminal value at end of year 5 = $4.41196 / (12% - 5%) = $63.03

current stock price P₀ = $3.132/1.12 + $3.38256/1.12² + $3.65316/1.12³ + $3.94542/1.12⁴ + $4.20187/1.12⁵ + $63.03/1.12⁵ = $2.796 + $2.697 + $2.600 + $2.507 + $2.384 + $35.765 = $48.749

P₀ = $48.749

2) following question 1, if the payout ratio is 80%, then total earnings per share (EPS) = $4.41196 / 0.8 = $5.51495 per share

if P/E ratio = 25, then the price of each stock in 6 years = 25 x $5.51495 = $137.87

answer; i believe the correct answer is (tall); ///good luck

1   all nations face the problem of scarcity because there are limited resources and unlimited wants. nations do not have enough factors of production to produce everything that their population wants. entrepreneurial resources initiate businesses to make new goods and services; labor resources produce goods and services.

2 there are four factors of production: natural resources, labor resources, capital resources, and entrepreneurial resources. natural resources are raw materials from nature that are used to produce goods. trees, water, and grains are natural resources. some natural resources, such as wheat and cattle, are renewable

3 wants

things that you do not need to have in order to survive, but would like to have

needs

things that you must have in order to survive

goods

physical products

services

tasks that a business perform for customers

resources

items that people can use to make or obtain what they need or want

determine

to settle or decide by choice of alternatives or possiblities

4 i really dont know