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Stocks/Market Value: Compute highest price and current dividend

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1) Auto After Accident (AAA) has paid a constant \$1.50 per share dividend to its common stockholders for the past 25 years. AAA expects to continue this policy for the next two years, and then begin to increase the dividend at a constant rate equal to 2 percent per year into perpetuity. Investors require a 12 percent rate of return to purchase AAA's common stock. What is the market value of AAA's common stock?

2) The last dividend on Trip Corporation's common stock was \$4.00, and the expected growth rate is 10 percent. If you require a rate of return of 20 percent, what is the highest price you should be willing to pay for this stock?

3) A share of common stock has a current price of \$82.50 and is expected to grow at a constant rate of 10 percent. If you require a 14 percent rate of return, what is the current dividend on this stock?

Solution Preview

1 Auto After Accident (AAA) has paid a constant \$1.50 per share dividend to its common stockholders for the past 25 years. AAA expects to continue this policy for the next two years, and then begin to increase the dividend at a constant rate equal to 2 percent per year into perpetuity. Investors require a 12 percent rate of return to purchase AAA's common stock. What is the market value of AAA's common stock?

Year Dividend growth rate
0 D0= \$1.500
1 D1= 0% \$1.5000
2 D2= 0% \$1.5000
3 D3= 2% \$1.5300 =( 1 + 2.% ) x ...

Solution Summary

Finds the stock price and the value of current dividend on a stock.

\$2.19