Question
Please answer this question based on assignment 1 which I provided all the way in the bottom As a follow up to Assignment #1 (
Please answer this question based on assignment 1 which I provided all the way in the bottom
As a follow up to Assignment #1 ( I provided with assignment 1 ninth bottom with the solution): Assume it is 7 years later and the Investor who purchased the stock 7 years ago, price of which you calculated in Assignment 1, is ready to sell the stock now.
What would be the price he can sell it for, assuming the grown rate of dividends has remained at 10.72% forever and the required rate of return has remained at 14%?
Show your work and provide a brief explanation of what you have done/steps you have taken and why. ( make sure is done based on the following criteria (i)- Computes today's dividend as the original dividend ($1.25) grown for 7 years at 10.72% (ii) Applies the Gordon Model, using the calculated dividend (iii) Finds the correct price (iv) Provides an explanation of steps taken)
ASSIGMENT #1
The QuickFixCompany just paid a dividend of $1.25 and analysts expect the dividend to grow at its compound average growth rate of 10.72% forever.
If you plan on holding the stock for just 7 years, and you have an expected rate of return of 14%, how much would you pay for the stock?
Assume that the next owner also expects to earn 14% on his or her investment.
Gordon model
P0 = D0 x (1 + g) / (r g)
P0= $1.25 x (1 x 1072) /0 .14-0.1072)
P0= 1.384 / 0.0328
P0= 42.195122
P0= 42.19
so the price of stock would be
$42.19
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