Mercier Corporations stock is selling for $95. It has just paid a dividend of $5 a share.

Question:

Mercier Corporation’s stock is selling for $95. It has just paid a of $5 a share. The expected growth rate in dividends is 8 percent.
a. What is the required rate of return on this stock?
b. Using your answer to Part a, suppose Mercier announces developments which should lead to increases of 10-percent annually. What will be the new value of Mercier stock?
c. Again using your answer to Part a, suppose developments occur that leave investors expecting that dividends will not change from their current levels into the foreseeable future. Now what will be the value of Mercier stock?
d. From your answers to Parts b and c, how important are investors’ expectations of future growth to the current stock price?
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...