Please don\'t use EXCEL 1. Suppose your broker is offering you shares of Crusty
ID: 2793266 • Letter: P
Question
Please don't use EXCEL
1. Suppose your broker is offering you shares of Crusty Inc. common stock that paid of dividend of $1.00 last year. You expect the dividend to grow at the rate of 4% per year for the next 3 years. You expected the future price at the end of 3 years when you sell it to be $22.50. Compute the price you would be willing to pay for the stock of Crusty today. Assume you require a 12% rate of return. (Show the timeline and set up the formula). (6pts) 2. Suppose your broker is offering you shares of Crusty Inc. common stock that paid of dividend of $1.20 last year. You expect the dividend to grow at the rate of 5% per year. Compute the price you would be willing to pay for the stock of Crusty today. Assume you require an 11% rate of return. (Show the timeline and set up the formula). (8pts)Explanation / Answer
Value today is the present value of the future dividends and value after 3 years
D0 = 1
D1 = 1*1.04
D2 = 1*1.04^2
D3 = 1*1.04^3
P3 = 22.50
P0 = 1*1.04/(1+0.12)^1 + 1*1.04^2/(1+0.12)^2 + 1*1.04^3/(1+0.12)^3 + 22.5/(1+0.12)^3 = $18.61
Present value you should pay = $18.61