Purchase Solution

A stock is expected to pay no dividends for the first three years. Assuming the stock is fairly priced, what is the current price of the stock?

Not what you're looking for?

Ask Custom Question

A stock is expected to pay no dividends for the first three years, i.e., D1 = $0, D2 = $0, and D3 = $0. The dividend for Year 4 is expected to be $5.00 (i.e., D4 = $5.00), and it is anticipated that the dividend will grow at a constant rate of 8 percent a year thereafter. The risk-free rate is 4 percent, the market risk premium is 6 percent, and the stock's beta is 1.5. Assuming the stock is fairly priced, what is the current price of the stock?
Student response: Correct

a.$ 69.31
b.$ 72.96
c.$ 79.38
d.$ 86.38
e.$100.00

Purchase this Solution
Solution Summary

The expert examines a stock which is expected to pay no dividends for the first three years.

Solution Preview

Please see the attached file.

A stock is expected to pay no dividends for the first three years, i.e., D1 = $0, D2 = $0, and D3 = $0. The dividend for Year 4 is expected to be $5.00 (i.e., D4 = $5.00), and it is anticipated that the dividend will grow at a constant rate of 8 percent a year thereafter. The ...

Solution provided by:
Manal Elkhoshkhany, MBA
Education
  • BA, Ain Shams University, Cairo Egypt
  • MBA, California State University, Sacramento
Recent Feedback
  • "ty i have more need help with"
  • "ty i have jmore i need help with"
  • "great help"
  • "excellent help"
  • "Very helpful and easy to understand."
Purchase this Solution
Free BrainMass Quizzes
Writing Business Plans

This quiz will test your understanding of how to write good business plans, the usual components of a good plan, purposes, terms, and writing style tips.

Income Streams

In our ever changing world, developing secondary income streams is becoming more important. This quiz provides a brief overview of income sources.

Learning Lean

This quiz will help you understand the basic concepts of Lean.

Marketing Management Philosophies Quiz

A test on how well a student understands the basic assumptions of marketers on buyers that will form a basis of their marketing strategies.

Employee Orientation

Test your knowledge of employee orientation with this fun and informative quiz. This quiz is meant for beginner and advanced students as well as professionals already working in the HR field.

View More Free Quizzes
Related BrainMass Solutions

  • Stock valuation

    The first dividend will be $3 and dividends are expected to grow at 4% per year thereafter. Given a current market price of $50.50, what is the required return on the stock?

  • CAPM, Expected Return, Valuation, Cost of Capital for Project

    If the stock is perceived to be fairly priced today, what must be investors' expectation of the price of the stock at the end of the year? 4. Reconsider the stock in the preceding problem.

  • Intrinsic Value and Stock Prices

    Jimmy is forecasting 5% growth in dividends indefinitely. However, Susan is predicting a 20% growth in dividends, but only for the next three years, after which the growth rate is expected to decline to 4% for the indefinite future.

  • Value of Financial Instrument

    Analysts expect its dividend to grow at 25% per year for the next three years and then 5% per year thereafter. If the required rate of return on the stock is 18%, what is the current value of the stock?

  • Bond and Stock Dividend Problems

    Calculate the yield to maturity if the bond has: a. 20 years remaining to maturity and is priced at $1,200 b. 10 years remaining to maturity and is priced at $950 2) Consider the stock of Davidson Company, which will pay an annual dividend

  • Required Rate of Returns and Dividend Growth Rate

    The dividends are expected to grow at a rate of 20% per year for the next 3 years, and then 5% per year thereafter. If the required rate of return of the stock is 15%, what is the current value of the stock?

  • Finance problems

    The stock is selling on the market for $95.00, and ABC must pay flotation costs of 5% of the market price. What is the cost of the preferred stock? 12. XYZ Company's current EPS is $5.25. It was $4.90 a year ago.

  • Stock price for Dynegy Stock

    s dividend is expected to grow at 5% for the next 2 years and then at 3% forever. If the current dividend is $2 and the required return is 14%, what is the price of the stock?

  • Stock Inter

    130472 Stock Inter Inter.com is a highly priced internet stock whose earnings in the coming year (E1) is expected to be $1 per share. Investors expect these earnings to grow at 80% (g) per year for the next 5 years.

View More Related Solutions