Reference no: EM131495351
1. Suppose Growth Unlimited has just paid a $1 dividend. Over the next 2 years, you estimate the dividends will increase 15%, 7% respectively. After that, dividends should grow at 5% per year. An appropriate discount rate for this rm is 10%. Find the stock price.
2. Suppose Growth Unlimited has just paid a $1 dividend. Over the next 4 years, you estimate the dividends will increase 50%, 25%, 21% and 16% respectively. After that, dividends should grow at 15% per year. An appropriate discount rate for this rm is 17%. Find the stock price.
3. Assume that discount rate (capitalization rate) is 14.5% and a company pays all of its earnings as dividends which amounts to $15 per share.
(a) Find the current stock price.
(b) What will happen to the stock price if the company managers think that there are good investment opportunities and retain 30% of the earnings (plowback ratio) when the return on equity of the stock is ROE=0.15?
(c) Why do you think the stock price increase, when the dividends paid to investors decrease?
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