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Company Z is expected to pay a dividend of $10.00 per share next year (out of earnings of $15 per share). Assume that the required

Company Z is expected to pay a dividend of $10.00 per share next year (out of earnings of $15 per share). Assume that the required rate of return on the stock is 8% and dividends are growing at a current rate of 5% per year.

a) What is the current stock price? b) Calculate the present value of stock if the company would pay all of its earnings as dividends, i.e. $15, next year? (Hint: Remember that growth rate changes to ?)

c) Calculate the present value of the growth opportunity for stock (PVGO) (Hint: It is the difference between two prices in a and b).

d) Briefly explain why Microsoft experienced a significant drop in price when it announced its first ever regular dividend along with huge profits, considering in terms of PVGO concept.

e) Company Z-prime is like Z in all respect except one: Its growth will stop after year 4. In year 5 and afterward, it will pay out all earnings as dividends. What is Z-prime's stock price? (Just like in the question, assume next year's EPS is $15, dividends is $10 and g=5%.)

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