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Question 4: Stock valuation (20 marks) (i). Elves Corporation has just paid a dividend of $1.25. Dividends are expected to grow at 15% a year
Question 4: Stock valuation (20 marks) (i). Elves Corporation has just paid a dividend of $1.25. Dividends are expected to grow at 15% a year for years 1-3, 30% a year for years 4-6, 10% a year for years 7-8, and 4% annually thereafter. What should the stock sell for today if the required return is 16 percent? (10 marks) (1) Mountain Co. is currently paying a dividend of $2.20 per share. The dividends are expected to grow at 25% per year for the next four years and then grow 5% per year thereafter. The required rate of return is 10%. What is the expected price 5 years from today? (5 marks) (iii). Macaroni Inc. announced that it would pay the following dividends over the next five years $0.50, $0.75, $1.50, S3, and $4. Afterwards, dividends will decline at a rate of 3 percent per year indefinitely(i.e negative growth rate in the stable period). What is the firm's current stock price if the required rate of return is 13%? (5 marks) (Total-20 marks)
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