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Cash Dividend

1. The DDM Corporation has just paid a cash dividend (D0) of $2 per share. It has consistently increased its cash dividends in the past by 5% per year, and you expect it to continue to do so. You estimate that the market capitalization rate for this stock should be 13% per year.

a. What is your estimate of the intrinsic value of a share (derived using the DDM model)?

b. Suppose that the actual price of a share is $20. By how much would you have to adjust
each of the following model parameters to "justify" this observed price:

i. The growth rate of dividends

ii. The market capitalization rate

2. The Rusty Clipper Fishing Corporation is expected to pay a cash dividend of $5 per share this year. You estimate that the market capitalization rate for this stock should be 10% per year. If its current price is $25 per share, what can you infer about its expected growth rate of dividends?

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SOLUTION:

1. a. P0 = D0(1+g)/(k-g) = 2(1+0.05)/(0.13-0.05) = $26.25

b. If the actual price of the share ...

Solution Summary

This posting gives the solution to the Cash dividend problem.

$2.19