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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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This note was uploaded on 01/14/2012 for the course ACCOUNT 102 taught by Professor Adams during the Spring '11 term at Bradford School of Business.
 Spring '11
 Adams

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