Business, 12.06.2021 16:50 mostman077

Helen's Pottery Co.'s stock recently paid a $1.50 dividend (D0 = $1.50). This dividend is expected to grow by 15% for the next 3 years, and then grow forever at a constant rate, g. The current stock price is $40.92. If rs = 10%, at what constant rate is the stock expected to grow following Year 3? a. 5.00% b. 6.50% c. 5.67% d. 4.25% e. 3.33%

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Answer from: Animallover100

e. 3.33%

Explanation:

The growth rate can be calculated as follow

Price of the stock = [ D0 x ( 1 + growth rate first 3 years )^1 / ( 1 + discount rate )^1 ] + [ D0 x ( 1 + growth rate first 3 years )^2 / ( 1 + discount rate )^2 ] + [ D0 x ( 1 + growth rate first 3 years )^3 / ( 1 + discount rate )^3 ] + [ ( D0 x ( 1 + growth rate first 3 years )^3 ) x ( 1 + growth rate forever ) / ( Discount rate - growth rate forever ) ]

Placing values in the formula

$40.92 = [ $1.50 x ( 1 + 15% )^1 / ( 1 + 10% )^1 ] + [ $1.50 x ( 1 + 15% )^2 / ( 1 + 10% )^2 ] + [ $1.50 x ( 1 + 15% )^3 / ( 1 + 10% )^3 ] + [ ( $1.50 x ( 1 + 15% )^3 ) x ( 1 + growth rate forever ) / ( 10% - growth rate forever ) ]

$40.92 = $1.57 + $1.80 + $2.07 + [2.28 x ( 1 + growth rate forever ) / ( 10% - growth rate forever )]

$40.92 = $5.44 + [2.28 x ( 1 + growth rate forever ) / ( 10% - growth rate forever )]

$40.92 - $5.44 = [2.28 x ( 1 + growth rate forever ) / ( 10% - growth rate forever )]

$35.48 = 2.28 x ( 1 + growth rate forever ) / ( 10% - growth rate forever )

$35.48 / $2.28 = ( 1 + growth rate forever ) / ( 10% - growth rate forever )

15.56140350 = ( 1 + growth rate forever ) / ( 10% - growth rate forever )

15.56140350 x ( 10% - growth rate forever ) = 1 + growth rate forever

1.556140350 - 15.56140350growth rate forever = 1 + growth rate forever

1.556140350 - 1 = growth rate forever + 15.56140350growth rate forever

0.556140350 = 16.56140350growth rate forever

growth rate forever = 0.556140350 / 16.56140350

growth rate forever = 3.36% ( nominal difference due to rounding effect )

Hence, the nearest option is e. 3.33%

Answer from: Quest

To keep up with the demands of industrialization

Answer from: Quest

It will be beneficial, because it can reduce interest rates and loan terms. this means that you will be paying close to the amount you have borrowed and will have to pay little to no interest paymentshope this

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Helen's Pottery Co.'s stock recently paid a $1.50 dividend (D0 = $1.50). This dividend is expected t...

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