Answer both questions correctly. Show all work. What constant growth rate in div
ID: 2653527 • Letter: A
Question
Answer both questions correctly. Show all work.
What constant growth rate in dividends is expected for a stock valued at $32.00 if next year's dividend is forecast at $2.00 and the appropriate discount rate is 12.5%? `
A. 5.00%
B. 6.25%
C. 6.75%
D. 15.38%
Gentleman Gym just paid its annual dividend of $3 per share, and it is widely expected that the dividend will increase by 5 percent per year indefinitely. If the discount rate is 15%, what should be fair price of its stock?A.$15
B.$20
C.$31.5
D.$48.3
Explanation / Answer
1. Stock price = Dividend next year / (Discount rate - Growth rate)
=> $32.00 = $2.00 / (12.5% - Growth rate)
=> Growth rate = 6.25%
Therefore, option (B)
2. Stock price = Dividend just paid * (1 + growth rate) / (Discount rate - Growth rate)
= $3.00 * (1 + 5%) / (15% - 5%)
= $31.50
Therefore, option (C)