1. The last dividend CompU paid was $0.80. The historical growth rate in dividends has been 6%, and analysts expect it to remain constant for the foreseeable future. Investors require a 14 percent rate of return.

a. What is the current value or price of CompUs stock?

=.80 * (1+.06) / (.14-.06) = $10.60

b. What is the expected dividend yield?

= .80 / 10.60 = .0755 0r 7.55%

c. If the growth rate was 8 instead of 6 percent, what would be the value of CompUs stock?

=.80 * (1+.08) / (.14 -.08) = $14.40

d. If the growth rate was as originally stated (6 percent) but the required rate of return increased from 14 to 16 percent, what would be the value of CompUs stock?

= .80 * (1+.06) / (.16-.06) = $8.48

e. Based on the answers for c. and d., what is the relationship between growth rates and stock price and required return and stock price?

A higher growth rate will increase the price of the stock overall. An increase in the required return will decrease the price of the stock overall.

2. Instead of the information in question 1, what if analysts expect CompUs dividend to grow by 25 percent for the next 3 years, but increased competition is expected to force their growth rate to a constant 6 percent thereafter. CompU just paid a dividend of $0.80, and investors rate of return is 14%. What is the value of CompUs stock today?