Reference no: EM131752616
PLEASE PLEASE PLEASE (break the steps down where it is understandable) and explain in detail if possible on how to do it
1. You look at a third stock that just paid a dividend of $1.20. This company has been growing very quickly as of late, and you are anticipating that one of the following two things will happen:
Scenario 1: the dividend will grow by 25% this next year and another 20% the year after that. Beyond these next two years, you expect the dividend growth to "level out" at a constant 10%.
Scenario 2: the company wants to retain its earnings to decide to fund its future growth, so it decides to stop paying dividends altogether for the next three years. In year 4, they expect dividends to resume, and they expect that the year 4 dividend will be 25% higher than the most recent dividend it paid ($1.20). From there, things follow the same pattern as Scenario 1...the dividend growth in the following year (year 5) will be 20%, and beyond those years you expect dividend growth to "level out" at a constant 10%.
Your required rate of return on this stock is 18% in both cases.
a. Write out the formula you would use to calculate the stock price of this stock in Scenario 1.
b. Write out the formula you would use to calculate the stock price of this stock in Scenario 2.