1.

use constant growth model: D1/r- g

$ .50/$ .15- $ .07= $6.25
dont need to multiply to find year one because we were given year one

2. .
Required return on stock r = D1/P0 + g
 
D1 = Stock at the end of the current period
 
P0 = Current price of stock
 
g = growth rate
 
D1 = D0 (1 + g)
 
= 4 (1 + g)
 
14% = 4 (1 + g)/80 + g
 
0.14 = (4 + 4g + 80g)/80
 
0.14 x 80 = 4 + 84g
 
11.2 - 4 = 84g
 
84g = 7.2
 
g = 7.2/84
 
g = 0.086 or 8.6%

3.

4.

Question a)
The dividend and the related timeline is as follows:

Yea
Dividend
r

1 -

2 -

3 1.00

4 1.50

5 2.25

6 2.43

 Dividend for years 4 and 5 = Previous dividend x 1.50

 Dividend for year 6 = Year 5 dividend x 1.08

Question b)
Price of the stock at Year 5
= Year 6 dividend / (Return - Growth)
= $2.43 / (15% - 8%)
= $34.71
Question c)
Price of the stock today = Present value of all the dividend till year 5 and present value of the
stock price at Year 5 @ 15% which is:

Year Total Benefits/ (Outflow) Discounting Factor (b ) =

P.V. (c ) = (axb)
s (a) (1/1+r)^n

0 - 1.0000 -

1 - 0.8696 -

2 - 0.7561 -

3 1.00 0.6575 0.66

4 1.50 0.5718 0.86

5 36.96 0.4972 18.38

SUM (PV) 19.89

Question d)
Dividend yield = Expected dividend / Current price
Here Expected dividend for next year is 0.00 so, Dividend yield today = 0.00%

(4. Simpkins Corporation is expanding rapidly, and it currently needs to retain all of its earnings;
hence it does not pay any dividends. However, investors expect Simpkins to begin paying
dividends of $1.00 in 3 years from now. The dividend should grow rapidly at a rate of 50% per
year during years 4 and 5. After year 5, the company should grow at a constant rate of 8% per
year. If the required rate of return on the stock is 15%:
a. Estimate the future dividends of this stock and show them on a time-line.
b. Find the expected price of this stock five years from today.
c. What is the intrinsic price of this book today?
d. What is the dividend yield on this stock today?)