Reference no: EM133114629
Question - You are an analyst in charge of valuing common stocks. You have been asked to value two stocks. The first stock NEW Inc. just paid a dividend of $6.00. The dividend is expected to increase by 50%, 30%, 15%, 10% and 5% per year respectively in the next five years. Thereafter the dividend will increase by 3% per year in perpetuity.
a) Calculate NEW's expected dividend for t = 1, 2, 3, 4, 5, and 6.
The required rate of return for New Stock is 10% compounded annually,
b) What is NEW's stock price?
The second stock is OLD Inc. OLD will pay its first dividend of $12 in 5 years. The dividend will increase by 20% per year for the following 3 years after its first dividend payment. Thereafter the dividend will increase by 2% per year in perpetuity.
c) Calculate OLD's expected dividend for t = 1, 2, 3, 4, 5, 6, 7, 8 and 9.
The required rate of return for Old Stock is 10% compounded annually,
d) What is OLD's stock price?
Now assume that both stocks have a required rate of return of 40% per year for the first 6 years, 20% per year for the following 5 years, and thereafter the required rate of return will be 10%.
e) What is NEW's stock price?
f) What is OLD's stock price?
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