Dividend discount model

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Problem 1: Dividend Discount Model

A stock's current annual dividend is $1 per share and its current expected return is 10%. It is currently traded at $40 per share. Assume future expected returns and expected dividend growth remain the same forever. The risk-free rate is 2%.

(a). What is the market's expectation on the perpetual average growth rate for this stock?

(b). Imagine that the firm announces higher earnings than the analysts expected, so now this stock's dividends are expected to grow at an annual rate of 8% after the announcement. What is this stock's new price?

(c). Suppose you purchased this stock before the earnings announcement in (b) at $40. What is your one-year holding period return after the announcement? (Hint: You expect to receive one dividend payment in the next year)

Reference no: EM133001467

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