Reference no: EM132675799

Consider four different stocks, all of which have a required return of 14% and the most recent dividend of $3.50 per share. Stocks W, X, and Y are expected to maintain constant growth rates in dividends for the foreseeable future of 7%, 0%, and -5% per year, respectively. Stock Z is a growth stock that will increase its dividend by 30% for the next two years and then maintain a constant 8% growth rate thereafter.

Required:

1. What is the current value of each of these four stocks?

2. What is the expected capital gains yield?

3. Discuss the relationship between the various returns that you find for each of these stocks.

4. It is planned that Stock X will keep constant dividends every year, explain how the model of such type of dividends had been developed. What are the assumptions of this model?

5. A number of publicly traded firms pay no dividends yet investors are willing to buy shares in these firms. How is this possible? Does this violate our basic principle of stock valuation? Explain and comment on the results of previous questions.