Chapter 7 HW 1. Lawrence Inc.?s most recent annual dividend was $1.80 per share,
ID: 2633385 • Letter: C
Question
Chapter 7 HW 1. Lawrence Inc.?s most recent annual dividend was $1.80 per share, Dividends are expected to grow at 8% annually for 3 years. From year 4 to infinity, dividends are expected to grow at 5%. The required return is 11%. What is the market value of the stock? 2. Company XYZ is expected io pay a dividend of $3.40 next year. In years 2 and 3, the growth rate is 5%. In year 4, we anticipate 15% growth. In year 5 and thereafter, growth should be a constant 10% per year. What is the maximum price per share an investor with a required return of 14% should pay foe this stock?Explanation / Answer
D1 = 1.8*(1+8%) = $1.94
D2 = 1.94*(1+8%) = $2.10
D3 = 2.30*(1+8%) = $2.48
D4 = 2.48*(1+5%) = $2.60
Price = 1.94/(1+11%)+2.10/(1+11%)^2+2.48/(1+11%)^3+(2.60/(11%-5%))/(1+11%)^3
=$36.95
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D1 = $3.40
D2 = 3.40*(1+5%) = $3.57
D3 = 3.57*(1+5%) = $3.75
D4 = 3.75*(1+15%) = $4.31
D5 = 4.31*(1+10%) = $4.74
Price = 3.40/(1+14%)+3.57/(1+14%)^2+3.75/(1+14%)^3+4.31/(1+14%)^4+(4.74/(14%-10%))/(1+14%)^4
=$80.97