1 A stock's last dividend was $5 per share and dividends are expected to grow by 6% per annum indefinitely. If the investors’ required rate of return is 12%. What is the value of the stock?
The value of the stock is given by:
Value = 5(1+.06)/(.12-.06)
Value = $88.33
2 An analyst forecasts a company will pay dividends of $2 in the first year, $3 in the second year and $3.50 in the third year. After the third year dividends are forecast to grow at 4% per annum. If an investor’s required rate of return is 12%. Find the value of the stock.
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