Question
1. Tony Stark, the founder of modern Stark Industries, had a vision of creating a corporation which steadily grows at 3.2% perpetually. Analysts expect Stark
1. Tony Stark, the founder of modern Stark Industries, had a vision of creating a corporation which steadily grows at 3.2% perpetually. Analysts expect Stark Industries to pay $2.24 dividend a year from today. Stark Industries cost of equity is 11%.
a. Calculate the stock price of Stark Industries. Round to three decimals. Please show your work.
b. Tony Stark has been informed by his scientists that they are close to reaching a breakthrough in robotics which will double their annual growth rates in the future. If their dividend grows at the current rate (3.2%) for the next three years (i.e., years 2-4) and the new growth rate is applicable after that, what will be the new stock price of Stark Industries? (Note: Stark Industries next year dividend is $2.24 and the cost of equity is 11%). Round to three decimals and please show your work.
2. Tony Stark wants a higher stock price and is willing to pay more dividends to achieve this. Tony now assumes that the Stark Industries stock will pay a dividend of $4.50 a year from today and that the Stark Industries stock is currently priced at a 3.2% perpetual growth rate. But Tony changed his mind about the perpetual dividend payment system. Instead, he wants to implement a plan which includes 15 years of dividend payments growing at a certain rate and no dividends afterwards. Tony does not want the new stock price of Stark Industries (calculated using the new $4.50 dividend in one year at a 3.2% perpetual growth rate) to be affected by this dividend policy change. If the cost of equity is still 11%, how much annual dividend growth should Tony aim to successfully implement this dividend policy change? Please show your work and round the growth rate to four decimal places.
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