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Expected Dividends

Question 7 (Stocks) (12 marks)

Your broker offers to sell you some shares of XYZ Co. common stock that paid a dividend of \$2 today. You expect the dividend to grow at the rate of 5% per year for the next 3 years, and then at 10% forever. The interest rate is 12%.

(a) Find the expected dividend for each of the next four years? (4 marks)

(b) What is the fair price of the stock three years from now? (4 marks)

(c) What is the fair price of the stock today? (4 marks)

Solution Preview

Question 7 (Stocks) (12 marks)

Your broker offers to sell you some shares of XYZ Co. common stock that paid a dividend of \$2 today. You expect the dividend to grow at the rate of 5% per year for the next 3 years, and then at 10% forever. The interest rate is 12%.

(a) Find the expected dividend for ...

Solution Summary

This solution is comprised of a detailed explanation to find the expected dividend for each of the next four years, and answer what is the fair price of the stock three years from now and the fair price of the stock today.

\$2.19