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# Evaluate dividends

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1) A stock you are evaluating just paid an annual dividend of \$2.50. Dividends have grown at a constant rate of 1.5% over the last 15 years and you expect this to continue.
a. If the required rate of return on the stock is 12% what is its fair present market value?
b. If the requested rate of return on the stock is 15% what is its expected price four years from today?

2) You are considering the purchase of a stock that is currently selling at \$64 per share. You expect the stock to pay \$4.50 in dividends next year.
a) If the dividend are expected to grow at a constant rate of 3% per year what is your expected rate of return on this stock?
b) If the dividend are expected to grow at a constant rate of 5% per year what is your expected rate of return on this stock?
c) What do your answers in parts a and b tell you about the impact of dividend growth rates on expected rate of returns?

3) A stock that you are evaluating is expected to experience supernormal growth In dividends of 8% over the next six years. Following this period, dividends are expected to grow at a constant rate of 3. The stock paid a dividend of \$5.50 last year and the required rate of return on the stock is 10%. Calculate the stocks fair present market value.

#### Solution Preview

We use the ddm to value the stocks in all three questions. The ddm says that price = dividend/(required return - growth rate).

1.
a) price = 2.5/(0.12-0.015) = 23.81
b) In 4 years from today, the dividend will be 2.5 X 1.015^4 = 2.65.

So, by ddm, it will be worth 2.65/(0.15 - 0.015) = 19.63. This value is expressed in the money 4 years from today.

To see how much it will be worth in present terms, we discount it 19.63/1.15^4 = 11.22.

So the stocks price in 4 year from ...

#### Solution Summary

Evaluate dividends: required rate of return, expected growth rate, present market value

\$2.19

## Evaluate Dividend Policy

Identify and research two to three companies that have faced issues similar to the following topic:

Topic: EVALUATE DIVIDEND POLICY ON WEALTH MAXIMIZATION

How does each company use dividend policies to maximize shareholder wealth? What issues do these companies face?

I need you to answer the following for each company:

1. Situation facing the company
2. How the company responded to the issue
3. Outcomes of the company's response to the situation

In another paragraph, compare and contrast the practices of each company related to those concepts and the financing alternatives that are available and the risks that are associated with each. For those risks identified, describe what tools are available to mitigate those risks.

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