Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Currently, a share of Alpha, Inc pays a dividend of $2 per year, payable at the end of each year (the year just started, so

Currently, a share of Alpha, Inc pays a dividend of $2 per year, payable at the end of each year (the year just started, so one year from today). It is expected to pay that $2 per year dividend forever. If the shareholder requires an 8% return on their investment, what price should they pay?

(2) Currently, a share of Beta, Inc pays a dividend of $3 this year - payable at the end of each year (the year just started, so one year from today). It is expected to that the dividend will grow at 4% per year forever. If the shareholder requires a 9% return on their investment, what price should they pay?

(3) Currently, a share of Gamma, Inc pays a dividend of $1 per year, payable at the end of each year (the year just started, so 1 year from today). It is expected that the dividend will double each of the following three years (so it will pay $2 at the end of year 2, $4 at the end of year 3 and $8 at the end of year 4). After year 4, the dividend will increase as 5% per year forever. If the shareholder requires a 10% return on their investment, what price should they pay?

Step by Step Solution

3.33 Rating (156 Votes )

There are 3 Steps involved in it

Step: 1

1 To calculate the price of a share of Alpha Inc we need to use the dividend discount model DDM The DDM formula is as follows Price Dividend Discount Rate Dividend Growth Rate In this case the dividen... blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Fundamentals of Corporate Finance

Authors: Richard Brealey, Stewart Myers, Alan Marcus, Devashis Mitra, Elizabeth Maynes, William Lim

6th Canadian edition

1259024962, 978-1259024962

More Books

Students also viewed these Accounting questions