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    Perpetual Dividend Growth; multiple growth rates

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    1-Perpetual Dividend Growth - A company just paid a divided of $3.00. If the dividends will grow at 5.5% per year and you require a return of 11.8 %, what is the most you should be willing to pay for the stock?

    2- Perpetual Dividend Growth - Star Light & Power increases its dividend 5% per year every year. This utility is valued using a discount rate of 9%, and the stock currently seels for $80 per share. If you buy a ahare of stock today and hold on to it for at least three years, what do you expect the value of your dividend check to be three years from today?

    3- DJIA - On Feb 6, 2003, the DJIA closed at 7,929.30. The divisor at that time was .14585278. Suppose the next day the prices for 29 of the stocks remained unchanged and one stock increased $5.00. What would the DJIA level be the next day?

    4- Multiple Growth Rates - Callaway Corp. is expected to pay the following dividends over the next four years: $14.00, $10.00, $5.00, $2.00. Afterwards, the company pledges to maintain a constant 7% growth rate in dividends forever. If the required return on the stock is 15%, what is the current share price?

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    Solution Preview

    1-Perpetual Dividend Growth - A company just paid a divided of $3.00. If the dividends will grow at 5.5% per year and you require a return of 11.8 %, what is the most you should be willing to pay for the stock?

    Do = 3.00
    G = 5.5%
    K = 11.8%
    D1 = Do * (1+g) = 3 * (1+5.5%) = 3.165
    By DDM, Po = D1 / (K-g) = 3.165/(11.8% - 5.5%) = $50.24

    2- Perpetual Dividend Growth - Star Light & Power increases its dividend 5% per year every year. This utility is valued using a discount rate of 9%, and the stock currently sells for $80 per share. If you buy a share of stock today and hold on to it for at least three years, what do you expect the value of your dividend check to be three ...

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