The Bloomington Electric Company operates in a stable industry and therefore has predictable dividend growth of 8% per year. The most recent annual dividend was paid yesterday in the amount of $4. Assume the appropriate discount rate is 15%.

 What is the current stock price?

1. Assuming the annual growth rates for the next three years is 20% each year; but starting the fourth year and after the growth rate remains constant at 8%. What is the current stock price under this scenario?
2. Assuming a dividend growth rate of 8%, what is the dividend yield of this stock if the current stock price is $40?

Answer

a)      Current Stock Price=Dividend Received/Dividend Growth Rate =4/.08 =50

  b)

Year	Dividend	D.F	PV
1	4.8	0.869565	4.173913
2	5.76	0.756144	4.355388
3	6.912	0.657516	4.544752
4	86.4	0.571753	49.39948
			62.47353

b)   ividend for infinite stream at 8% from 4^th year =Dividend of that year /Rate of dividend

                                                                                        =6.91/.08

                                                                                        =86.4

c)      Dividend Yield =Dividend Received/Stock Price

                          =4/40

                          =10%

Posted Date: 3/12/2013 6:17:02 AM | Location : United States

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