Question
Q1. Gentry Can Company's (GCC) latest annual dividend of $1.25 a share was paid yesterday as the company maintained its historic 7% annual rate of
Q1. Gentry Can Company's (GCC) latest annual dividend of $1.25 a share was paid yesterday as the company maintained its historic 7% annual rate of dividend growth. The current market price is based on the belief that the 7% growth rate will be maintained forever. However, you believe that the dividend growth rate will increase by 8% for the next three years and that in three year's time the stock price will be $40. You and other investors require a 12% rate of return. (18 marks)
a)What do you believe is the current intrinsic value of GCC stock? (6 marks)
b) Assuming that you were right about the dividends growing at 8% forever and that the market incorporates that at t=3 in the share price. What will the price be at t=3? (6 marks)
c) The company Econ305 Inc, just announced yesterday that its 4th-quarter earnings were 50% higher than last year's 4th quarter. But the Econ305 share price dropped by 2.2% yesterday! Give at least two reasons why this may have happened, even though the market was, and still is, informationally efficient. (6 marks)
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