Slow decline Company just paid a dividend of 250 per share I

Slow decline Company just paid a dividend of $2.50 per share. If dividends have been declining at a constant rate of 2 percent and you require 10 percent return, what is the value of the stock? 1. Hatstand and Bandstand Inc. stock is selling for $38. The company has been maintaining a constant growth rate of dividends of 5 percent. If the required rate of return for this company is 14 percent, what was the most recent dividend paid by the company? 2. Sanding and Bending Inc. will pay no dividends for the next seven years. In the Year 8, it will pay a dividend of $6 and maintain a constant growth of 6 percent thereafter. If the required rate of return is 12 percent, what is the value of the stock? 3.

Solution

1.value of the stock = 2.50*(1 - 0.02)/(0.10 + 0.02) = 20.42

2. 38 = dividend*1.05/(0.14 - 0.05)

dividend = 3.26

3.

value at the end of 5 years = 6/(0.12 - 0.06) = 100

value of the stock today = 100/(1.12^5) = 56.74