A company will pay a $2 per share dividend in 1 year. The dividend in 2 years

Question:

A company will pay a $2 per share dividend in 1 year. The dividend in 2 years will be $4 per share, and it is expected that dividends will grow at 5% per year thereafter.The expected rate of return on the stock is 12%.

a. What is the current price of the stock?

b. What is the expected price of the stock in a year?

c. Show that the expected return, 12%, equals dividend yield plus capital appreciation.

Dividend per share:

Year 1 ........$2.00

Year 2.......$4.00

Growth rate.........5.00%

Expected rate of return..12.00%

Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...