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I need help specifically with parts b, c, and d below. Thank you! Problem 1 (the equations provided below may prove helpful) a) Bacon Sign
I need help specifically with parts b, c, and d below.
Thank you!
Problem 1 (the equations provided below may prove helpful) a) Bacon Sign Inc. currently pays a dividend of $2.12 and the dividend is expected to grow at a constant rate of 3% per year. The stock is 25% more risky than the market as a whole. If the risk-free rate is 2% and the equity risk premium for the market is 8%, what is the estimated price of the stock? b) Assume the information from part a) is correct except the firm expects dividends to grow at a rate of 10% per year for the next 4 years and then resume a long-run constant growth rate of 3% per year. What is the revised estimated current price of Bacon Signs stock? c) What is the percent change in price as a result of the temporary supernormal growth in dividends? 1.e. given your answer to part a), how much has the price increased, not in actual dollars, but in percentage terms. d) Let's look at the source of our price increase. What is the combined PV of the first four dividends in part a) repeat for part b) e) Notice that the temporary increase in dividends is "a gift that keeps on giving". Only a small fraction of the total stock price change is the result of the temporary super normal growth rate in dividends. The remainder of the price increase is b/c even when the firm reverts to its long-run growth rate, it is starting from a much higher dividend and thus the dollar increases each year are also larger. As a result, the temporary increase in dividends in the short-run has a continuing impact in the long-runStep by Step Solution
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