Suppose that Do = $1.00 and the stock's last closing price is $15.85. It is expected that earnings and dividends will grow at a constant rate ofg = 3.50% per year and that the stock's price will grow at this same rate. Let us assume that the stock is fairly priced, that is, it is in equilibrium,and the most appropriate required rate of return is rs = 10.00%.The dividend received in period 1 is D1 = $1.00 × (1+0.0350) = $1.04 and the estimated intrinsic value in the same period is based on theD2constant growth model: P₁: TS-8Using the same logic, compute the dividends, prices, and the present value of each of the dividends at the end of each period.Activity FrameDividendPricePVt 10.00%Period(Dollars)(Dollars)(Dollars)0$1.00$15.8511.0316.46$0.9421.0717.08$0.9731.1117.69$1.0141.1518.31$0.9751.1918.92$0.94The dividend yield for period 1 isand it willThe capital gain yield expected during period 1 isand it willeach period.each period.If it is forecasted that the total return equals 10.00% for the next 5 years, what is the forecasted total return out to infinity?3.50%6.50%10.00%

In this scenario, we are using the constant growth model to calculate dividends, prices, and present…

Answered: Suppose that Do = $1.00 and the stock's…

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter8: Basic Stock Valuation

Section: Chapter Questions

Problem 17MC: Now assume that the stock is currently selling at $30.29. What is its expected rate of return?

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