Answer: a) $42
b) $10.5
c) $7
d) $4.67
e)$2.63
Explanation:
We can use the Gordon Growth Model of Stock Valuation to find out these answers.
The formula is,
P = D1 / r – g.
D1 = the annual expected dividend of the next year.
r = rate of return.
g = the expected dividend growth rate (assumed to be constant)
To calculate Next year's dividend (D1) we can use the growth rate as follows,
D1 = D0 (1+g)
D1 = 0.4 (1+0.04)
D1 = $0.416
D1 = $0.42
Now that we have D1 we can use it for all the questions.
a) an investor wants a return of 5%
= D1 / r – g.
= 0.42 / 0.05 - 0.04
= $42
b) investor wants a return of 8%
= D1 / r – g
= 0.42/ 0.08 - 0.04
= $10.5
c) investor wants a return of 10%
= D1 / r – g
= 0.42 / 0.1 - 0.04
= $7
d) investor wants a return of 13%
= D1 / r – g
= 0.42 / 0.13 - 0.04
= $4.67
e) investor wants a return of 20%
= D1 / r - g
= 0.42 / 0.2 - 0.04
= $2.63
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