Please don\'t use EXCEL 5. The first expected dividend on Sprex Corp. common sto
ID: 2793269 • Letter: P
Question
Please don't use EXCEL
5. The first expected dividend on Sprex Corp. common stock is $4.00 and the expected growth rate is 10% If you require a rate of 20%, what is the highest price you should be willing to pay for this stock? (2pts) 6. Suppose your broker is offering you shares of Crusty Inc. common stock that paid of dividend of $1.60 last year. You expect the dividend to grow at the rate of 6% per year for the next 3 years, and then to have a long-run normal growth rate of 4%. Compute the price you would be willing to pay for the stock of Crusty today. Assume you require a 13% rate of return. What would be the price you would like to pay for this stock today? (Show the timeline and set up the formula). (10pts)Explanation / Answer
5.
According to dividend-discount model,
P0 = D1/(R-G)
P0 = Current stock price
D1 - Dividend at t =1
R - Required rate
G - Growth rate
P0 = 4/(0.2-0.1) = $40
Current price = $40