A No Growth DDM A perpetual preferred stock pays an annual d

A.

No Growth DDM A perpetual preferred stock pays an annual dividend of $2.20 per share and investors require an 9% return. The intrinsic value of a share of this stock is _______.

$20.87

$24.44

$ 19.80

$23.98

B.

Constant Growth DDM A stock just paid a dividend of $1.00 per share. Dividends are expected to grow at a constant rate of 9% per year forever. Investors expect and require a 12% return on this investment. The intrinsic value of this stock is __________.

$35.77

$36.33

$36.08

$35.89

Solution

A.

Perpetual stock pays periodic dividend for indefinite period of time.

Value of stock = Periodic dividend/ expected return

                           = 2.2/ 0.09

                            = 24.44

B.

Stock value = Divided (D1)/ (required return – dividend growth rate)

                      = (1 * 1.09)/ (.12 – 0.09)

                       = 1.09/ 0.03

                        = 36.33