ch8hw - Chapter 8 Homework Solutions 2. We need to find the...

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2. We need to find the required return of the stock. Using the constant growth model, we can solve the equation for R . Doing so, we find: R = (D 1 / P 0 ) + g = ($2.50 / $48.00) + .05 = .1021 or 10.21% 6. We know the stock has a required return of 12 percent, and the dividend and capital gains yield are equal, so: Dividend yield = 1/2(.12) = .06 = Capital gains yield Now we know both the dividend yield and capital gains yield. The dividend is simply the stock price times the dividend yield, so: D1 = .06($60) = $3.60 This is the dividend next year. The question asks for the dividend this year. Using the relationship between the dividend this year and the dividend next year: D1 = D0(1 + g) We can solve for the dividend that was just paid: $3.60 = D0(1 + .06) D0 = $3.60 / 1.06 = $3.40 7. The price of any financial instrument is the PV of the future cash flows. The future dividends of this stock are an annuity for eight years, so the price of the stock is the PVA, which will be: P0 = $11.00(PVIFA10%,8) = $58.68
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ch8hw - Chapter 8 Homework Solutions 2. We need to find the...

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