COMM 203 Study Guide - Final Guide: Financial Instrument, Preferred Stock, Dividend Yield
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Q1) the stopperside wardrobe co. just paid a dividend of . 95 per share on its stock. The dividends are expected to grow at a constant rate of 6% per year indefinitely. Answer: constant dividend growth model, pt = dt (1 + g) / (r g) Pt = price at a certain time period; dt = dividends at certain time period; g = constant growth rate; r = rate of return; p0 = Current stock price (p0) = d0 (1 + g) / (r g) = . 95 (1. 06) / (. 11 . 06) = . 34. The dividend at year 4 is the dividend today times the pvif (present value interest factor) for the growth rate in dividends and four years, so: Price at time period 3 (p3) = d3 (1 + g) / (r g) = d0 (1 + g)4 / (r g) = . 95 (1. 06)4 / (. 11 . 06) = . 24.
