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Ch_7 - BAC1644 2 tutorial Ch 7 We need to find the required...

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BAC1644 tutorial Ch 7 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 R = ($2.45 / $49.50) + .055 R = .1045 or 10.45% 4. Using the constant growth model, we find the price of the stock today is: P 0 = D 1 / ( R g ) P 0 = $3.85 / (.14 .0475) P 0 = $41.62 6. We know the stock has a required return of 11 percent, and the dividend and capital gains yield are equal, so: Dividend yield = 1/2(.10) Dividend yield = .050 = 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: D 1 = .050($65) D 1 = $3.25 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: D 1 = D 0 (1 + g ) We can solve for the dividend that was just paid: $3.25 = D 0 (1 + .05) D 0 = $3.25 / 1.05 D 0 = $3.10 13. Here, we have a stock that pays no dividends for nine years. Once the stock begins paying dividends, it will have a constant growth rate of dividends. We can use the constant growth model at that point.
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