1. Two companies have just paid $2.00 dividend. Company NG Inc. is expected to continue the same dividend payment indefinitely. CG Corp. dividend is expected to grow at a constant rate of 4% indefinitely. For both companies the market required rate of return (discount rate) is 12%. a. Calculate both companies current stock price. b. Calculate both companies' stock price one year from today and the one year rate of return for an investor buying at the current rate, getting the dividend and selling at immediately after that at the one year price.. c. Calculate the expected stock price of both companies five years from the present. What would be the expected rate of return for an investor buying either stock in year five and holding it for one year2 Exercise hints: 1b. For the price one year from today you need the dividend in time period 2, see example 6.1. 1c. For the price in year three you need the dividend in time period four, see example 6.1. = Example 6.1: D 3 a. Po Normal = $30.00 .15.05 .15-.05 b. Rate of return is defined as (proceeds -cost ) cost Proceeds are the price plus the dividend at the end of the period, and the cost is the current price such that: P: +D P R = Po D. *1.05 3.15 P, = $31.50 1. Normal .15-.05 .15-.05 31.50 +3.00-30.00 R = = 15% 30.00 C. D. = 3 D2 = D. *1.50 = 4.50 D = 4.50*1.50 = 6.75 D. = 6.75*1.05 = 7.0875 7.0875 = 70.8075 .15-.05 .15-.05 D P. 3 4.50 6.75 70.8075 e. Po Abnormal = 57.05 1.15.1.152 1.153 . 1.153 1.15.1.152 .1.153 1.159 = = DA d. Pz.Abnormal = D D2 + + + = + + +