Sheet1 Sheet2 Sheet3 Homework 7-Stock Valuation (1) Suppose Motel 6 just paid a dividend of $2.00 per share on its stock. The dividends are expected to grow at a constant rate of 10% per year indefinitely. If the investors require a return of 16%, what is the current price? What will the price be in 10 years? DO * (1+g)= $2 * (1+10%) = $2.20 Stock Price = D1 /(r - g) D1 r16% g=10% $2.20/(16%-10%)= Stock Price - D1 /(r - g) Sheet1 Sheet2 Sheet3 Homework 7- Stock Valuation (2) The next dividend payment by Blue Cheese Inc will be $4.00. The dividends are anticipated to maintain a growth rate of 5 percent a year forever. If the stock currently sells for $40 per share, what is the required return? Stock Price = D1 / (r - g DI $4 r ? g 5% Stock Price D1 / (r - g) R- 5%=10% $4/ (R 5%) $40 Sheet3 Sheet1 Sheet2 Homework 7-Stock Valuation (3) Theme Parks will pay a $5 per share dividend next year It pledges to increase its dividend by 10% per year in perpetuity If you require a return of 18% a year on this investment how much will you pay for this stock today? Stock Price-D1/(r - g) D1 = $5 r 18% g=10% (r-g) 18%-10% = 8% Stock Price D1 / (r - g) $5/(18%-10%) = =