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Question 2 (25 marks) Stock A has just distributed a dividend of S5. It is expected that the company will increase its dividend by 0%

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Question 2 (25 marks) Stock A has just distributed a dividend of S5. It is expected that the company will increase its dividend by 0% in the coming year, 10% in the second and third years and 7% in the fourth year. Starting from Year 5, Company A is forecast to maintain the dividend growth rate at 5% forever. a) If you are going to buy Stock A at the beginning of Year 4 - End of Year 3), how much should you pay if Stock A's prevailing yearly required rate of return at that time is expected to be 8%? (3 marks) b) How much should you pay for Stock A today if its required rate of return is 8%? (6 marks) c) Suppose you are going to buy Stock A today and hold it for one year. Estimate the following yields: 1) Dividend Yield (2 marks) ii) 1-year capital gains yield (6 marks) iii) 1-year total yield (HPY) (2 marks) d) Using the following formula to confirm 1-year total yield calculated in (ciii): P.(1 + HPY-year) - D+P (3 marks) c) Continued with (a). Suppose you paid $200 to buy Stock A at the beginning of Year 4. Estimate the long- term) average yearly overall rate of return from Stock A'investment. (Hint: Stock A is a constant dividend- growth stock.] (3 marks) -End

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