Assume that stock will begin paying dividends

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Assume that a stock will begin paying dividends one year from today, starting with a fifty cent annual dividend. The consensus analyst forecast is that dividends will grow at 12% per year for the following four years (meaning that the dividend in year 5 is expected to be 12% higher than the dividend in year 4). After that, it is believed that the dividend growth rate will fall to a long-term perpetual 5% rate.

a. Estimate the value of the stock if the market requires a 14% expected return.

b. Estimate the value of the stock if the market requires a 9% expected return.

Reference no: EM131304794

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