Question
For the next year, Swiss Reinsurance Co. (Swiss Re) will pay a dividend of CHF0.1 per share. You expect that over the next few years
For the next year, Swiss Reinsurance Co. (Swiss Re) will pay a dividend of CHF0.1 per share. You expect that over the next few years Swiss Re will gradually increase its dividend to 1.60 francs per share. Specifically, you expect that D1 = 0.10, D2 = 0.40, and D3 = 0.80, and D4 = 1.60 francs per share. After year 4 you expect the dividends to grow in perpetuity at the rate of g = 5% per year, so that for example D5 = 1.05 D4, D6 = 1.05 D5, etc. You have estimated that the expected rate of return on other stocks of equivalent risk to Swiss Re is 10% per year.
a)Based on the dividend forecasts above, what is your estimate of the current (time 0) value of a share of Swiss Re common stock? b)If the perpetual growth rate is 4.5% rather than 5% what is your new estimate for the value of a share of common stock? c)If the next few years are more difficult for Swiss Re than predicted and D1 = 0.10 but dividends only grow at 5% in year 2 and in perpetuity. What is the value of a share of common stock in this scenario? pts)
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