ABC Manufacturing pays dividends annually. Dividends have been growing 4% a year. Today is May 1, 2014.
Question:
a. Scenario 1. It is May 1, 2015, and the company announces the new widget is a great success. ABC pays its previously announced $1.20 dividend and announces the 2016 dividend will be $2.50 per share. What will be the stock price on May 1, 2015, if dividends beyond 2016 are expected to grow at 6% in perpetuity?
b. Scenario 2. It is May 1, 2015, and the company announces that the widget program has been ended and that the next annual dividend will be $1.248, 4% larger than the dividend it just paid. What is the stock price May 1, 2016?
c. If the probability of success of the R&D (scenario 1) is 30%, what price would you expect the stock to be today?
d. Suppose you bought the stock for the price you calculated in part (c) and the research and development program is successful. What will be the 1-year rate of return on your investment? What will be the 1-year rate of return on your investment if t he R&D is not successful? What is the expected rate of return?
Discount Rate
Depending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal... 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...
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a Price on May 1 2015 2501 06 6250 b Price on May 1 2015 12481 04 ...View the full answer
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Related Book For 
Fundamentals of Corporate Finance
ISBN: 978-1259024962
6th Canadian edition
Authors: Richard Brealey, Stewart Myers, Alan Marcus, Devashis Mitra, Elizabeth Maynes, William Lim
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