2. Ameritech Corporation paid dividends per share of $3.56 in 1992, and dividends are expected to grow 5.5% a year forever.
The stock has a beta of 0.90, and the Treasury bond rate is 6.25%. (Risk premium is 5.5%)
a. What is the value per share, using the Gordon growth model?
b. The stock was trading for $80 per share. What would the growth rate in dividends have to be to justify this price?
2. Using the solution methods to Problem 2 of Chapter 13 as guide, provide solutions to the questions below using the following data on Kraft Foods, Inc.
a. What is the indicated value per share if beta is 0.60, last 12 months cash dividends are $1.16, riskless return is 4%, and the market risk premium is 5.25%? Use the dividend discount model to calculate the indicate value per share.
b. If a representative stock price is $28, what growth rate justifies this price?
c. Is your growth rate (i) clearly too low, (ii) clearly too high, or (iii) about right?
Why do you think so?
The solution epxlains the questions relating to dividend discount model