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The Extreme Reaches Corp. last paid a $1.50 per share annual dividend. The company is planning on paying $3.00, $5.00, $7.50, and $10.00 a share over the next four years, respectively. After that the dividend will be a constant $2.50 per share per year forever. A) What is the market price of this stock if the market rate of return is 15 percent? Also estimate the dividend yield over the first year.
B) Continue from the previous problem. What is the market price of this stock in one year? What is the capital gains yield over the first year?
Im looking for help on part B, I have already completed part A but it would be helpful to check my answer. ($26.57/share)

Respuesta :

jepessoa

Answer:

a)

Div₁ = $3

Div₂ = $5

Div₃ = $7.50

Div₄ = $10

Div₅ = $2.50

the terminal value at year 4 = $2.50 / 15% = $16.67

P₀ = $3/1.15 + $5/1.15² + $7.50/1.15³ + $26.67/1.15⁴ = $2.61 + $3.78 + $4.93 + $15.25 = $26.57

dividend yield over the first year = $3 / $26.57 = 11.29%

b)

P₁ = $5/1.15 + $7.50/1.15² + $26.67/1.15³ = $4.35 + $5.67 + $17.47 = $27.49

capital gains yield = ($27.49 - $26.57) / $26.57 = 3.46%

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