Calculating required rate of return, present value, stock price

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The last dividend that was paid yesterday (D0) on a Corporation's common stock was $8.00, and the expected growth rate is 0 percent. The required rate of return on this stock is 10 percent.

1. What is the present value of the future growth opportunity represented by the 5% growth rate, compared to 0% growth rate?

2. What is the highest price you should be willing to pay for this stock?

3. Suppose the firm's expected growth rate is 5% now, what is the price of the stock?
Assume that the other information remains the same as before,
i.e., D0 = $8; ks = 10%.

4. Assume the constant growth rate is 5%. What is the stock price at time 1, i.e., one year from today? Assume that the other information remains the same as before,
i.e., D0 = $8; ks = 10%.

Solution Preview

The last dividend that was paid yesterday (D0) on a Corporation's common stock was $8.00, and the expected growth rate is 0 percent. The required rate of return on this stock is 10 percent.

1. What is the present value of the future growth opportunity represented by the 5% growth rate, compared to 0% growth rate?

The PVGO is the difference in price (which is the present ...

Solution Summary

The solution explains some calculations relating to required rate of return, present value, price of a stock, etc.

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