The Baron Basketball Company (BBC) earned $10 a share last year and paid a dividend of $6 a share. Next year, you expect BBC to earn $11 and continue its payout ratio. Assume that you expect to sell the stock for $132 a year from now. If you require 12 percent on this stock, how much would you be willing to pay for it? a) Given the expected earnings and dividend payments, if you expect a selling price of $110 and require an 8 percent return on this investment, how much would you pay for the BBC stock?
b) Over the long run, you expect dividends for BBC to grow at 8 percent and you require 11 percent on the stock. Using the infinite period DDM, how much would you pay for this stock?