Question
Suppose stock BBB pays an annual dividend of $5. Shareholders require a rate of return of 10% annually on the stock. a) Use the DDM
Suppose stock BBB pays an annual dividend of $5. Shareholders require a rate of return of 10% annually on the stock.
a) Use the DDM model to find the price of the stock
b) Suppose the firm just paid a dividend of $5 but it is expected that the dividend rate will grow at a fixed rate of 8% for all future dates. What is the price of the stock today?
c) Now suppose you hear from a well known analyst that even though the firm just paid a $5 dividend, the firm is expected to have a dividend growth rate of 20% per year over the next 5 years. After that, dividends will remain constant forever. Over these next 5 years, the firm plans to take on massive amounts of debt. So the discount rate investors should use is 15% over those supernormal growth years. After that the discount rate should revert to 10%. Calculate the price of a share of stock
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