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QUESTION

Consider a stock that is planning to make its next dividend payment $3. They plan to increase the dividend by 30% for one year and then by 15% each...

1.Consider a stock that is planning to make its next dividend payment $3.25. They plan to increase the dividend by 30% for one year and then by 15% each year for three years. After that, they will level off to a constant growth rate of 4% in dividends per year forever. The required return on the stock is 15%.

a.Trace stock price, dividend yield, and capital gains yield for each year from today until 10 years from now. Explain what is happening with each of these at different points in

time.

b. Suppose that the actual price of this stock today (the market price) is $25. What is the implied required return on the stock?

2. Consider a stock that is not planning to pay a dividend until five years from now. The first dividend (D5) will be $1.25. For 2 years after that, the dividend will increase by 20% each year. After that, the dividend growth rate will level off to a permanent 4%. The required return for

this stock is 12%.

a.Trace stock price, dividend yield, and capital gains yield for each year from today until10 years from now. Explain what is happening with each of these at different points in

time.

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