Stock Values (LO1) The Stopperside Wardrobe Co. just paid a dividend of $1.45 per share on its stock.

The dividends are expected to grow at a

1 constant rate of 6% per year indefinitely. If investors require an 11% return on The Stopperside Wardrobe Co. stock, what is the current price? What
will the price be in three years? In 15 years?

Dividend (CF) $1.45 Per Share

Growth Rate 6% Per Year
Rate of return 11%

Cuurent Price $30.74

Price in 3 Years Price in 15 Years

Price $36.61 Price $73.67

Valuing Preferred Stock (LO1) Big Pond Inc. has an issue of preferred stock outstanding that pays a $4.75 dividend every year in perpetuity. If this
8 issue currently sells for $93 per share, what is the required return?

Dividend $4.75
Price $93

Required Return 5.11% *Required return = Dividend / Price

Stock Valuation (LO1) Talcville Farms just paid a dividend of $3.20 on its stock. The growth rate in dividends is expected to be a constant 5% per year
13 indefinitely. Investors require a 15% return on the stock for the first three years, a 13% return for the next three years, and an 11% return thereafter.
What is the current share price?

Required Rate
Dividend $3.20 First 3 Years 15%
Growth Rate 5% Next 3 Years 13%
Rest 11%

D0 * (1 + g)^n
Price at year 6 (P $75.05

Year Price
 3 $3.44
4 $3.20
5 $2.97
6 $52.01
$61.62

P0 $48.54

Non-Constant Dividends (LO1) Chamberlain Corporation is expected to pay the following dividends over the next four years: $12, $8, $7, and $2.50.
16 Afterward, the company pledges to maintain a constant 5% growth rate in dividends forever. If the required return on the stock is 12%, what is the
current share price?

Years Dividends
1 $12 Growth Rate 5%
2 $8 Required Retu 12%
3 $7
4 $2.50

Price at year 4 P4 $37.50

Present Value P0 $47.50

Supernormal Growth (LO1) Rabbit Town Corp. is experiencing rapid growth. Dividends are expected to grow at 30% per year during the next three
18 years, 20% over the following year, and then 6% per year indefinitely. The required return on this stock is 10%, and the stock currently sells for $76
per share. What is the projected dividend for the coming year?

Growth Rate 30% For the next 3 years

20% For the next year
6% indefinitely

Required Return 10%

Current Selling
Price P0 $76

Dividend in Year 4=D0*((1+D74)^3)*(1+D75)

D4 2.6364(D0) 2.6364(D0)
P4 D0*(1.3)^3*1.2*(1.06)/(0.1-0.69.8646(D0)

P0 1.3(D0)/1.1+1.3^2(D0)/1.1^2+1.3^3(D0)/1.1^3+2.6364(D0)/1.1^4+69.864(D0)/1.1^4
P0 53.74830954 (D0)
76 53.74830954 (D0)

D0 $1.41

D1 $1.84